What does a bond represent?

A bond is essentially a financial instrument that represents a loan made by an investor to a borrower, which can be a corporation or a government. When an investor purchases a bond, they are effectively lending money to the issuer of the bond in exchange for periodic interest payments and the return of the bond's face value when it matures. This characteristic of bonds as a loan distinguishes them from other financial instruments like stocks, which represent ownership in a company, or cash reserves held by the government, which do not involve lending.

Bonds are a key component of the fixed-income market, where they provide investors with predictable income through interest payments, known as coupon payments, until the bond matures. This understanding is fundamental for anyone studying financial management or investing, as it highlights the role of bonds in financing for organizations and the different kinds of risk and return associated with them.