Course → Unit 4: Bonds & Fixed Income → Lesson 4.1

What Is a Bond?

Every time the Singapore government builds a new MRT line or Apple wants cash without selling a piece of the company, they don't always go to a bank — they borrow directly from investors like you, by issuing a bond, and understanding exactly how that loan is structured is what lets you decide whether it's a good place to park your money.

A bond is a loan — you are the bank

Strip away the jargon and a bond is one of the simplest financial instruments that exists: it's an IOU. An organisation — a government or a company — needs a lump sum of cash today. Instead of asking a bank for it, they ask the public directly. You hand over money now. In exchange, they promise two things: to pay you a fixed amount of interest at regular intervals for an agreed period, and to return your original lump sum in full at the end of that period.

That's the entire transaction. When you buy a bond, you are not becoming a part-owner of the business the way a shareholder does — you have no vote, no claim on future profits beyond what was promised, and no upside if the company does spectacularly well. What you get instead is a contractual promise. This is why bonds sit in a completely different category from stocks: a stock is a claim on ownership and future profit; a bond is a claim on a specific, pre-agreed cash payment. Finance calls this category of investment fixed income — "fixed" because the payments are set in advance, not left to float with how well the business performs.

Key terms: face value, coupon rate, maturity, and yield

Every bond can be fully described using four numbers. Once you understand these four, you can read the terms of almost any bond you'll ever encounter.

Face value (also called par value)

This is the amount the issuer agrees to pay you back at the end of the loan — typically $1,000 or $100 per bond, though it varies by market. Think of it as the "principal" of the loan. It's also usually the price you pay to buy the bond when it's first issued.

Coupon rate

This is the annual interest rate the issuer promises to pay you, expressed as a percentage of face value. The word "coupon" is a hangover from the days when bonds were literal paper certificates with physical coupons attached — you'd tear one off and post it in to claim your interest payment. Today it's all electronic, but the name stuck.

Maturity

This is the date the loan ends and the issuer must repay the full face value. Bond maturities commonly range from 1 year (short-term) to 30 years (long-term). Once a bond matures, it stops existing — there's nothing left to hold or trade.

Yield

This is the more subtle one, and the one investors actually care about most: yield is the return you actually earn on a bond given the price you paid for it, which can differ from the coupon rate if you bought the bond secondhand at a price above or below face value. You'll go much deeper into this in the next lesson — for now, just know that coupon rate and yield are not always the same number.

Government bonds vs corporate bonds

Not all borrowers are equally trustworthy, and bonds are grouped by who's doing the borrowing.

Government bonds are issued by national governments — Singapore Government Securities (SGS), US Treasury bonds, and so on. Because a stable government can raise taxes or, in some cases, print its own currency to meet obligations, these are generally considered the safest bonds available, and they pay the lowest interest rates as a result. Corporate bonds are issued by companies — anyone from a blue-chip firm like DBS or Apple to a smaller, riskier business — to fund expansion, refinance debt, or cover operations. Because a company can go bankrupt in a way a government usually can't, corporate bonds carry more risk of not being repaid, so they have to offer higher interest rates to attract lenders.

Why bonds exist alongside stocks

If stocks can offer higher long-term returns, why would any investor bother with bonds at all? Three reasons. First, predictability — a bond's interest payments and repayment date are agreed in advance, while a stock's future price is never guaranteed, which makes bonds useful for goals with a fixed timeline, like a payment due in three years. Second, lower volatility — bond prices generally move around far less than stock prices, so holding some bonds smooths out the bumps in a portfolio's value. Third, priority in bad times — if a company goes bankrupt, bondholders are legally paid back before shareholders see a single dollar, which is why bonds are considered senior to stock in a company's capital structure.

This is also why professional investors almost never hold 100% stocks or 100% bonds — they blend the two based on how much risk they can tolerate and when they'll need the money, a topic you'll explore fully in Unit 7 on portfolio construction.