What is a key characteristic of a bond?

A key characteristic of a bond is that it represents a fixed repayment obligation. When an investor purchases a bond, they are essentially lending money to the issuer, which can be a corporation or government. In return for the loan, the issuer agrees to pay back the principal amount at a specified maturity date and usually makes periodic interest payments, known as coupon payments, to the bondholder.

Unlike stocks, where ownership in a company is gained and dividends may be paid based on profits, bonds do not provide ownership rights or a share in the profits of the issuer. Rather, they are structured to provide predictable income through fixed interest payments, which makes them a more secure investment compared to equities. Bonds also do not inherently offer high-risk features; they typically are considered lower risk compared to stocks, depending on the creditworthiness of the issuer. Hence, the unique structure of a bond as a fixed repayment obligation is what distinguishes it within financial instruments.