What are "bonds"?

Bonds are debt securities issued by corporations, municipalities, or governments to raise capital. When an entity issues a bond, it is essentially borrowing money from investors, who are then considered creditors to the issuer. In return for the loan, the issuer promises to pay back the principal amount on a specified maturity date and provides periodic interest payments, known as coupon payments, to the bondholders.

Understanding bonds as a form of debt is crucial, as they represent a loan rather than ownership in a company, which is the case with equity shares. Bonds usually have defined terms of repayment and are used as a means of financing projects or managing operational costs.

In contrast to other financial instruments mentioned, such as short-term financial instruments or savings accounts, bonds typically have a longer duration and are characterized by fixed interest rates. This structured repayment plan along with the interest payment distinguishes bonds from equity shares and financial instruments like savings accounts, further solidifying their role as a critical component of the capital markets.