What is a bond?

If a share makes you an owner, a bond makes you a lender. When you buy a bond, you are lending money to whoever issued it — and they are contractually obliged to pay you back, with interest.

Debt, not equity

A bond is a debt instrument. The issuer — a government, a corporation, or a supranational body like the World Bank — borrows money from investors and is legally required to pay interest and repay the principal. Unlike a shareholder, a bondholder has no ownership and no votes. But there’s a trade-off in your favour: if things go wrong, lenders have a higher-priority claim than shareholders. You get paid before the owners do.

The three numbers that define a bond

Almost every bond comes down to three things:

• Face value (par) — the principal the issuer will repay at the end, and the base on which interest is calculated. It’s usually quoted as 100 or 1,000.
• Coupon — the periodic interest payment, usually a fixed percentage of face value. A 5% coupon on £1,000 pays £50 a year (often split into two £25 payments). For a fixed-rate bond, this never changes.
• Maturity — the date the bond’s life ends and the issuer repays the face value, typically alongside the final coupon.

Maturities range from a few months (these short ones are called "bills") to 30 years or more. As a rule, the longer the maturity, the more sensitive the bond’s price is to changes in interest rates.

Price vs face value

Here’s a point that trips up beginners: the price you pay for a bond in the market can be above or below its face value, but the amount you get back at maturity is always the face value. A bond’s market price moves around — mainly as interest rates change — while its redemption value stays fixed. That relationship between price and interest rates is the heart of fixed income, and it’s what shapes the yield curve.

Bond vs stock: the trade-off

Put simply:

• Bondholders are lenders. They get contractual interest and repayment, and rank ahead of shareholders if the company fails — lower risk, lower return.
• Shareholders are owners. They have unlimited upside if the company thrives, but the last claim on its assets if it doesn’t — higher risk, higher potential return.

Neither is "safer" in the abstract; they sit at different points on the same risk-and-return spectrum, which is exactly why most portfolios hold both.