Bond
A loan you make to a government or company, in exchange for interest agreed in advance.
What is a bond?
A bond is a loan in the form of a security. You buy a 1,000-lei bond and the issuer, a government or a company, pays you interest (the coupon) and repays the 1,000 lei on a set date (maturity).
Unlike a shareholder, who is a part-owner sharing gains and losses, a bondholder is a lender. They get what was promised as long as the issuer does not default.
Bonds can be sold before maturity, and their price moves opposite to market interest rates. When rates rise, older bonds with lower coupons fall in price.
The government securities the Romanian Ministry of Finance sells to the public are a kind of bond, bought either directly from the state or on the stock exchange.
A 1,000-lei bond with a 6% coupon pays 60 lei a year and returns 1,000 lei at maturity.
How is a bond different from a bank deposit?
A deposit sits at a bank and is guaranteed up to €100,000. A bond is a loan to a government or company; it can be sold before maturity, but its price moves with market interest rates.
Why do bond prices fall when interest rates rise?
Because an old bond pays a fixed coupon smaller than new bonds pay. To be as attractive, it has to sell for less.
Related terms
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