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What is a bond?

Bonds are a type of debt security. They are effectively an IOU between a borrower (the issuer of the bond) and a lender (the investor who purchases the bond) – just as a bank deposit is effectively an IOU between the bank as borrower and the depositor as lender.

When a government, corporation or other entity needs to raise funds, they can borrow money from investors by issuing bonds to them. Investors who purchase a bond from an issuer are essentially lending money to the issuer for a fixed period of time.

In return, investors receive the bond promising that they will receive interest payments (or coupon payments) at certain intervals, and also that they will have their principal returned on a stated future date.

Where the bond is quoted on a securities exchange, such as ASX, the investor can realise their investment by selling that bond to another investor at the current market price.

Investing in bonds – tips and tools

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