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The Glossary
Bond

A bond is a contract between a lender and a borrower. The borrower, typically a company or a government, issues a bond to finance its activities. The investor who purchases the bond is effectively the lender, generally lending money for a fixed period and specific conditions. Most bonds involve paying a regular interest (the coupon) and repaying the amount borrowed (the principal) at the end of the contract.

 

Investor Corner

Bonds are generally a way for the issuer, which is either a business or a government, to diversify its sources of funding. They can be issued for a specific project or for more generic cash needs. On the investor side, bonds represent a potential source of regular income. The visibility they provide and the fact that they tend to be less risky than other instrument such as equities, is the reason why they have an important share in the portfolios of institutional and individual investors.

 

Today

The interest paid by the issuer generally depends on how lenders perceive its ability to repay (creditworthiness) and the rates set by the central banks (rate environment). For more than a decade now, rates have been very low in most countries which explains why the interest paid by issuers is often insignificant. As of late 2020, a third of the bonds issued globally yielded less than 1%. Some bonds even have a negative yield, such as the bonds issued by the Swiss government.

 

Anecdote

Green bonds are a popular type of bond these days. They are issued to support environmental projects, hence the “green” in the name.