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Bond Basics

What Are Bonds?

A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer.* In return for that money, the issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due.

Among the types of bonds available for investment are: U.S. government securities, municipal bonds, corporate bonds, mortgage- and asset-backed securities, federal agency securities and foreign government bonds. The characteristics of several different types of U.S. bonds are described in the Bond Basics Glossary at the end of this section. Market practices described here apply to the U.S. bond market, and may differ from those in other countries.

Bonds can be also called bills, notes, debt securities, or debt obligations. To simplify matters, we will refer to all of these as "bonds."

*Terms that appear in italics are defined in the Glossary at the end of this section.