Bond

A bond is a debt instrument. The issuer (a government or company) borrows money from you and promises to pay you interest at regular intervals, usually quarterly or annually, then return your principal on a set date called the maturity date. You own this contract and can sell it to someone else in the secondary market before it matures.

Because a bond gives you predictable income, but its value moves with interest ratesTermInterest rate×سعر الفائدةThe percentage of principal charged by a lender or paid by a saver, usually stated as an annual rate.Open the term and the issuer's creditworthiness. When interest rates in the market rise, the value of an older bond you own falls (its return becomes less attractive relative to new bonds), and the reverse happens when rates fall. For example, a bond paying a 5% return becomes far less attractive once new bonds are issued paying 8%, so its market price drops to compensate a buyer for the lower payout.This means a bond is not a passive investment you simply hold to maturity. It is an instrument that moves with market conditions.

How far it moves is not a mystery, and it is roughly countable before you buy. The longer a bond has left to run, the harder a rate change hits it: as a working rule, a bond with ten years to maturity loses somewhere near a tenth of its price when market rates rise by one percentage point, while one with two years left barely registers the same move. So when a bond is described to you as safe, the question that settles it is how many years are left on it. That number is on the term sheet, and nobody volunteers it.

The income has a second cost that is never printed next to the yield. A bond pays the same coupon for its whole lifeTermLife insurance×التأمين على الحياةA contract where you pay regular premiums and the insurer pays a sum to your named beneficiaries if you die during the coverage period.Open the term, so what that coupon buys shrinks every year prices rise. A bond paying 5% while prices rise 4% is delivering 1%, and if you spend the coupon as it arrives rather than reinvesting it, you are quietly spending down the real value of the money you lent.

• A government bond carries less default risk than a corporate bond, but typically offers a lower return.
• If you sell before maturity you may gain or lose depending on how prices have moved, not just the stated yield.
• The issuer's credit rating matters: a lower-rated government or company pays a higher yield to compensate for the added risk.
• International bonds are priced in foreign currencies, so you carry both interest rate risk and currency risk when converting back.