Terms of Use   

Bonds are financial instruments where a bond issuer, such as the US federal government or a company, is borrowing money.  Essentially bonds are just loans. 

Bonds purchasers, called bondholders, can be individuals, companies and governments.  When you buy a bond you are loaning the bond issuer money. 

Interest payments are made to bondholders based on the rate, payment frequency (monthly, quarterly, annually, etc.) and for the term (6 months, 1 year, 10 years, 30 years, etc.) defined in the bond prospectus, which is a document that details the particulars about the bond.     

Unlike familiar loans such as a car loan, bonds are actively traded (bought and sold) after they are initially issued.  If bondholders hold a bond to its maturity date, they are repaid the entire amount they invested in the bond. 

If the bondholder sells a bond prior to its maturity date, they will receive either more or less than they paid for the bond.  It all depends on what similar instruments with the same maturity date are paying on the market at the time the bond is sold. 

If the market rates are higher than the interest rate paid on the bond, the bond is sold for less than what it was originally sold for.  This is called being sold at a "discount".  If the market rates are lower than the bond's rate, the bond will conversely be sold for a "premium", or more than what it was originally purchased for.

One can see that the further out the maturity of the bond, the more risk the bondholder is assuming.