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What a bond is

A bond is a loan you make to a government or a company. It pays interest and returns your money on a set day.

How it works

You lend €1,000 for ten years. Each year you get a fixed interest payment (the coupon), say €30. At the end (the maturity) you get your €1,000 back. Governments and companies borrow this way.

Names you will meet

Italy’s government bonds are BTPs, Germany’s are Bunds, France’s are OATs. Companies issue bonds too, usually paying more because they are more likely to fail than a big government.

You can sell before the end

Bonds trade on exchanges like shares. Before maturity, their price moves with interest rates and with how safe the borrower looks. Held to the end, a bond from a borrower that pays returns its full amount.

Bond funds

A bond fund holds many bonds and keeps buying new ones as old ones end. It never matures, so it never promises your money back on a set day; its price keeps moving with rates.

Key takeaways

  • A bond is a loan with fixed payments and an end date.
  • Its price moves before the end; held to the end it pays back in full if the borrower pays.
  • A bond fund has no end date.