A bond is a contract between an entity that borrows money and a creditor that lends it to the
entity. When you purchase a bond, you are effectively giving a loan to the bond issuer. With
government bonds, also known as sovereign bonds, a national government borrows money to
fund its operations. The bond specifies what interest rate (coupon) will be paid and at which
times during the life of the bond and when the principal funds, also known as face value, will be
returned. This is called the maturity date. Bonds are an asset class by themselves that offers
more stability than stocks.
The return on a bond is known in advance, which makes them low risk investments, although
the risk is related to the credit rating of the bond issuer. If the coupon rate is higher than the
prevailing interest rates, a bond becomes attractive so the demand for these bonds will
increase, driving up their price. If the bond interest is lower than the prevailing interest rates,
their price will drop, so bonds are inversely correlated to interest rates.
A government (sovereign) bond is issued by a national government. Investors loan money at a
fixed or variable interest rate. By issuing bonds, the state receives funds that can be injected
into the economy in the form of low-interest loans. The alphanumeric code of the bond
represents the abbreviated name of the issuing state as well as the time to maturity. For
example, US02Y is the US government bond that matures in 2 years. The tabs below make it
easy to switch between the bond price and yield.
