What does a bond represent?

A bond represents a debt evidence with interest repayment, which is crucial to understanding how bonds function in the financial markets. When an entity, such as a corporation or government, issues a bond, it is essentially borrowing money from the bondholder. The bondholder agrees to lend a specified amount of money for a fixed period, in return for regular interest payments—known as coupon payments—until the bond matures. At maturity, the issuer repays the principal amount to the bondholder.

This structure distinguishes bonds from stocks; unlike stocks, which represent ownership stakes in a company, bonds are agreements that create a creditor-debtor relationship. Bonds also differ from currency, which is used as a medium of exchange or store of value, and are not a form of ownership in a company like stocks are. Understanding this core function of bonds is essential for anyone looking to engage in wealth management or investment strategies.