When a company or a government needs to raise cash, it may opt to borrow the money it needs from the public through the selling of bonds.

The company or government department (the “issuer”) of the bond outlines how much money it would like to borrow and specifies a length of time it wants the money for, along with an interest rate it is willing to pay. Investors who then lend the requested money to the issuer become the issuer’s creditors through the bonds that they hold.

As with most loans, the borrower pays interest to the lender. Interest payments on a bond are usually fixed, although bond prices fluctuate in value and are sensitive to changes in national interest rates. Bonds are often called fixed income securities because the amount of income the bond will generate each year is fixed or set.

There are funds, which invest in bonds, and they are termed income funds as they pay distributions to investors on a regular basis, usually monthly. This steady stream of income is an attractive feature for bondholders.

Many bonds can be traded in a similar way to stocks and shares,and although they can be volatile depending upon the issuer and the quality of the bond issued, the bond or fixed income markets tend to be less volatile than equity (stock) markets.

This means that although bond share prices move up and down in value, usually in correlation with interest rates, they historically have tended to have less extreme price movements than most stocks, particularly in the short-term.

See also:

 Guide to City Jargon

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