{"concept":{"id":8,"slug":"bond","term":"Bond","shortDefinition":"A debt instrument: the buyer lends money to the issuer (a company or a government) in exchange for periodic interest payments and repayment of the principal on a future maturity date.","longDefinition":"Unlike a share, a bond carries no ownership or voting rights: the bondholder is a creditor, not a part-owner. Creditors (bondholders) get paid before shareholders if the company is liquidated. A bond's main risk is default risk (credit risk) -- the possibility that the issuer can't pay the interest or repay the principal. Not all bonds are equally safe: a bond from a government with solid finances is considered much safer than one from a heavily indebted company, and that lower risk is usually reflected in a lower interest rate. The higher the perceived default risk, the higher the interest the market tends to demand in exchange for taking it on. A bond's price, like a share's, can also change on the secondary market before maturity -- typically moving in the opposite direction to general interest rates."},"relations":{"requirement":[],"contrast":[{"concept":{"id":6,"slug":"share","term":"Share","shortDefinition":"A security that represents a proportional part of a company's ownership -- whoever holds it is a part-owner of that company, in the proportion that share represents of the total.","longDefinition":"Buying a share is not lending money to the company (that's what bonds are): it's acquiring a portion of its ownership. As a shareholder, you're entitled to a proportional part of the profits if the company pays dividends, and in principle to a vote at the shareholders' meeting -- although in practice that vote carries little weight if your stake is small compared to other shareholders. A share's value isn't set by the company: it's determined by the market, through the same supply-and-demand mechanism that sets the price of any asset in a financial market."}}],"related":[{"concept":{"id":2,"slug":"financial-market","term":"Financial market","shortDefinition":"A mechanism that connects those with savings available to those who need financing, through the exchange of financial assets (stocks, bonds, currencies, among others).","longDefinition":"A financial market doesn't exchange goods or services like a consumer market -- it exchanges financial assets. It serves three functions: it channels savings toward productive investment, it provides liquidity (the ability to turn an investment back into cash), and it sets prices through the meeting of supply and demand. The stock exchange is one of the best-known financial markets, but others exist too: the fixed-income market (bonds), the currency market, and the commodities market, among others."}}],"calculatedBy":[]},"curricularPosition":[{"id":7,"moduleId":3,"slug":"what-is-a-bond","title":"What is a bond?","summary":"You understand what a bond is, how it structurally differs from a share, and what default risk is.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you understand what a bond is, how it structurally differs from a share, and what default risk is.\n\n## Content\n\nA bond is a debt instrument: the buyer lends money to the issuer -- a company or a government -- in exchange for periodic interest payments (the coupon) and repayment of the principal on a specific future date (maturity).\n\nBonds are also known as **fixed income**, because the issuer agrees on the interest rate and repayment date in advance -- unlike a share, that agreed-upon return doesn't depend on how the company performs in the future.\n\nUnlike a share, a bond carries no ownership or voting rights: the bondholder is a creditor, not a part-owner. This has an important consequence if the issuing company runs into serious financial trouble: creditors (bondholders) get paid before shareholders if the company is liquidated -- shareholders are last in line, and often recover nothing.\n\nA bond's main risk is default risk, also called credit risk: the possibility that the issuer can't pay the interest or repay the borrowed principal. Not all bonds are equally safe -- a bond from a government with solid finances is considered much safer than one from a heavily indebted company, and that lower risk is usually reflected in a lower interest rate. The higher the perceived default risk, the higher the interest the market tends to demand in exchange for taking it on.\n\nA bond's price, like a share's, can also change on the secondary market before maturity -- it typically moves in the opposite direction to general interest rates, something explained in more detail later in the curriculum.\n\n## Example\n\nWhen a government needs to fund its public spending, it can issue government bonds: whoever buys them lends money to the government in exchange for periodic interest and repayment of the principal on the agreed maturity date, for example in 10 years.\n\n## Common mistakes\n\n- Confusing a bond with a share just because both are \"something you buy in the market\" -- a bond is debt with a fixed repayment date, a share is indefinite ownership with no repayment date.\n- Assuming all bonds are equally safe -- default risk varies enormously depending on who issues them.\n\n## Summary\n\nA bond is a loan -- also known as fixed income, because the interest and repayment of the principal are agreed in advance: the buyer lends money in exchange for periodic interest and repayment of the principal at maturity. Unlike a share, it carries no ownership or voting rights, and bondholders get paid before shareholders if the company is liquidated. Default risk varies according to the financial strength of whoever issues the bond.\n\n## Self-check\n\nWhat's the fundamental difference between being a shareholder and being a bondholder of the same company?\n\nWhy does a bond with higher default risk usually offer a higher interest rate?","bodyHtml":"<h2>Objectives</h2>\n<p>By the end of this lesson you understand what a bond is, how it structurally differs from a share, and what default risk is.</p>\n<h2>Content</h2>\n<p>A bond is a debt instrument: the buyer lends money to the issuer -- a company or a government -- in exchange for periodic interest payments (the coupon) and repayment of the principal on a specific future date (maturity).</p>\n<p>Bonds are also known as <strong>fixed income</strong>, because the issuer agrees on the interest rate and repayment date in advance -- unlike a share, that agreed-upon return doesn't depend on how the company performs in the future.</p>\n<p>Unlike a share, a bond carries no ownership or voting rights: the bondholder is a creditor, not a part-owner. This has an important consequence if the issuing company runs into serious financial trouble: creditors (bondholders) get paid before shareholders if the company is liquidated -- shareholders are last in line, and often recover nothing.</p>\n<p>A bond's main risk is default risk, also called credit risk: the possibility that the issuer can't pay the interest or repay the borrowed principal. Not all bonds are equally safe -- a bond from a government with solid finances is considered much safer than one from a heavily indebted company, and that lower risk is usually reflected in a lower interest rate. The higher the perceived default risk, the higher the interest the market tends to demand in exchange for taking it on.</p>\n<p>A bond's price, like a share's, can also change on the secondary market before maturity -- it typically moves in the opposite direction to general interest rates, something explained in more detail later in the curriculum.</p>\n<h2>Example</h2>\n<p>When a government needs to fund its public spending, it can issue government bonds: whoever buys them lends money to the government in exchange for periodic interest and repayment of the principal on the agreed maturity date, for example in 10 years.</p>\n<h2>Common mistakes</h2>\n<ul><li>Confusing a bond with a share just because both are &quot;something you buy in the market&quot; -- a bond is debt with a fixed repayment date, a share is indefinite ownership with no repayment date.</li><li>Assuming all bonds are equally safe -- default risk varies enormously depending on who issues them.</li></ul>\n<h2>Summary</h2>\n<p>A bond is a loan -- also known as fixed income, because the interest and repayment of the principal are agreed in advance: the buyer lends money in exchange for periodic interest and repayment of the principal at maturity. Unlike a share, it carries no ownership or voting rights, and bondholders get paid before shareholders if the company is liquidated. Default risk varies according to the financial strength of whoever issues the bond.</p>\n<h2>Self-check</h2>\n<p>What's the fundamental difference between being a shareholder and being a bondholder of the same company?</p>\n<p>Why does a bond with higher default risk usually offer a higher interest rate?</p>","sortOrder":2,"readingMinutes":5,"difficulty":"Básico","url":"/en/academy/fundamentals/financial-assets/what-is-a-bond"}],"graphSummary":{"root":{"type":"concept","id":"8","depthFromRoot":0,"entity":{"type":"concept","slug":"bono","term":"Bono","excerpt":"Instrumento de deuda: quien lo compra le presta dinero a quien lo emite (una empresa o un gobierno) a cambio de intereses periódicos y la devolución del capital en una fecha de vencimiento futura."}},"depth":1,"returnedNodes":1,"truncated":false,"hasCycle":false,"nodes":[{"type":"concept","id":"8","depthFromRoot":0,"entity":{"type":"concept","slug":"bono","term":"Bono","excerpt":"Instrumento de deuda: quien lo compra le presta dinero a quien lo emite (una empresa o un gobierno) a cambio de intereses periódicos y la devolución del capital en una fecha de vencimiento futura."}}],"edges":[]},"relatedNews":[],"relatedEntities":[]}