What a Bond Actually Is
A bond is a loan. When you buy a bond, you are the lender: you hand money to the issuer — a government, a company, or a municipality — and the issuer promises to repay you according to a set schedule. That schedule is embedded in the bond's legal terms, making it a form of debt security rather than an ownership stake.
The core terms of any bond are:
- Face value (par value): the amount the issuer promises to repay at maturity, typically £1,000 or $1,000 per bond.
- Coupon rate: the annual interest rate, expressed as a percentage of face value. A bond with a 5% coupon on £1,000 par pays £50 per year.
- Coupon payment frequency: most bonds pay semi-annually (twice a year), though some pay annually or quarterly.
- Maturity date: the date on which the issuer repays the face value and the bond ceases to exist.
A zero-coupon bond strips out the periodic interest payments entirely. Instead of paying coupons, it is issued at a discount to face value and redeems at par. A zero-coupon bond issued at £700 and maturing at £1,000 in ten years delivers all return through price appreciation rather than income.
How Bonds Differ from Equity
Bonds and shares both allow investors to put capital to work with a company, but their legal standing is fundamentally different. Bondholders are creditors: they have a contractual right to receive coupon payments and the return of principal. If the company fails, bondholders are paid before shareholders in the liquidation hierarchy.
Shareholders are residual claimants: they own what is left after all creditors — including bondholders — have been satisfied. In a bankruptcy, equity often receives nothing. This senior position makes bonds less risky than equities for the same issuer, which is why bonds generally offer lower expected returns.
The Scale of the Global Bond Market
The bond market is larger than the equity market by total value. As of the mid-2020s, the global bond market exceeds $130 trillion in outstanding debt, compared to roughly $100 trillion for global equities. Governments and corporations depend on continuous access to bond markets to fund operations and investment.
The financial innovation of tradeable government debt has deep roots. The Bank of England Consols, introduced in 1751, were perpetual government bonds — they paid a fixed coupon indefinitely with no maturity date. Consols allowed the British government to borrow at scale to finance wars and infrastructure, and they remained in existence (and were traded) until the UK government finally redeemed the last of them in 2015. They are a vivid illustration of how the bond contract, once established, can endure for centuries.