Bonds are debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities and states to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid when the loaned funds (bond principal) are to be returned (maturity date). Interest on bonds is usually paid every six months (semi-annually). One of the common bonds we come across is convertible bond. It’s a bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder.
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