What's a bond?

Essentially, a bond is a fancy IOU. Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects. When you buy a bond, you are loaning your money to the issuer - be it General Electric or Uncle Sam - for a certain period of time.

In return, you get interest on the loan, and you get the entire loan amount paid back either on a specific date (known as the bond's maturity date) or at a future date of the issuer's choice. The length of time to maturity is called the bond's term.

Bond investors have a language all their own. A bond's value when it's issued is known as its "par value," and its interest payment is known as its "coupon." For example, a $1,000 bond paying 7% a year has a $70 coupon. Expressed another way, its "coupon rate" is 7%.

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