What Is a Bond?

Lending, not owning

Buying a stock makes you a part-owner of a company. Buying a bond makes you a lender - to a government or a company - with none of the ownership rights a shareholder has, but a specific, contractual promise of repayment instead.

The three numbers that define a bond

• Face value - the amount you'll get back at maturity (commonly ₹1,000 or ₹100 per unit, depending on the bond).
• Coupon rate - the fixed interest rate paid periodically (often annually or semi-annually) on the face value.
• Maturity date - when the issuer repays the face value in full.

A bond with a ₹1,000 face value, 7% coupon, and 10-year maturity pays ₹70 a year for 10 years, then returns the ₹1,000 at the end.

Bond prices move too - just not the way people expect

Bond prices in the secondary market move opposite to prevailing interest rates: when interest rates rise, existing bonds paying a lower fixed coupon become less attractive, so their market price falls; when rates fall, existing higher-coupon bonds become more valuable, and their price rises. This is a genuinely counter-intuitive relationship worth knowing before assuming a bond's price is as stable as its fixed coupon suggests.

Bonds vs. fixed deposits

Both promise a fixed return, but a bond can be bought and sold on the market before maturity (at a price that may be above or below face value), while a bank FD generally can't be transferred - only broken early, usually at a penalty. Bonds also carry the issuer's own credit risk (a corporate bond can default; a bank FD is separately insured up to a limit by DICGC).

The main risk

The core risk with any bond is the issuer's ability to actually pay - government bonds are considered very low risk (backed by the sovereign), while corporate bonds carry a credit rating reflecting the issuing company's own financial strength, with lower-rated bonds paying a higher coupon precisely to compensate for that extra risk.

The takeaway

A bond trades certainty of ownership upside for a defined, contractual repayment schedule - the trade-off is lower expected long-term return than equity, in exchange for a clearer, more predictable claim on your money.