UNIVERSITY OF ILLINOIS
College of Business - Department of Finance
Finance 300 (Financial Markets)
Bonds are sometimes described as debt securities and sometimes as fixed-income investments. If you understand what each of
these terms means, you understand how bonds work. When you buy a bond, you’re actually lending the issuer money that you
expect to get back. That’s the debt. The issuer pays interest for the use of your money, typically on a set schedule. That’s the
People often think of bonds as a more conservative investment than stock. It is true that you can buy them at issue and hold
them until maturity, so that what is happening to bond prices in the marketplace doesn’t affect you. But changing demand does
affect the price, so you can also trade bonds to realize capital gains from selling for more than you paid to buy them.
You can create a diversified portfolio by purchasing bonds of different terms, from different issuers, and with a range of ratings.
From AAA-rated municipals to high-yield corporate (bonds), from bonds with maturities of a month to those with maturities of
100 years, from zero-coupon convertibles to mortgage-backed bonds, there’s more variety among bonds than you might think.
A bond is a debt investment. When you buy a bond, you invest by lending money to a corporation, government, or government
agency that issues, or sells, the bond. The issuer
has the use of the money for a specific term, or period of time, and promises to
repay the loan, or principal, when the bond matures at the end of the term. The issuer also promises to pay interest, figured as a
percentage of the par value, or face value, of the bond for the term.
Bonds are also known as fixed-income investments because you earn interest at a specific rate on a regular schedule until the
maturity date. Some investors buy bonds primarily for this income, while other investors trade bonds to realize a profit when
Types of Bonds
There are many different bond issuers: U.S. corporations, the U.S. Treasury, cities and states as well as federal, state, and local
government agencies. Many overseas governments and businesses also sell bonds on the U.S. market, as well as in international
Bonds are major sources of corporate borrowing. Debentures,
the most common type of corporate bond, are backed by the
general credit of the corporation, while asset-backed bonds are
backed by specific corporate assets, such as property or
Millions of bonds have been issued by state and local
governments. General obligation bonds are backed by the full
faith and credit of the issuer, and revenue bonds by the income
generated by the particular project being financed.