A bond is a fixed-income investment in which investors lend money to an entity (usually a company or government) that borrows at variable or fixed rates for a period of time. Bonds are used by corporations, municipalities, state and sovereign governments to raise money and finance various projects and activities. The owner of the bond is the creditor of the issuer. Bonds are generally considered less risky than stocks and offer lower returns. It is because the issuer promises to return their face value to the holder at maturity. In addition, most bonds pay investors interest at a fixed rate, which is what the issuer promises the stock will sometimes pay dividends to shareholders.
There is risk of the interest rate, inflation and liquidity risk. When interest rates rise, bond prices fall; Instead, when interest rates go down, bond prices go up. The longer the bond matures, the greater the interest rate risk. Inflation risk reduces the purchasing power of future interest and principal payments by bond investors. It would also lead to higher interest rates and lower bond prices. Liquidity risk makes it difficult for investors to find buyers when they want to sell bonds, potentially forcing them to sell at prices below market value.Bonds are typically the most liquid during periods of typical bond trading.