Bonds are securities where money upfront is paid back with interest. Because they typically provide steady payments of interest called coupons back to the bondholder, they are also called fixed income securities.
There are two main components of a bond: principal and interest. When a government or company first issues a bond, investors provide the issuer the principal amount up front. That principal is then used by the issuer for current expenses and the par value of the bond is repaid at the maturity date of the bond. Bonds can be issued at discounts to the par value but are still repaid in full at the maturity date.
If you’ve ever borrowed money yourself, the concept is the same. You (the issuer) issue a promise to repay an amount (the principal) plus interest over time to a lender (the investor) for a purchase you want to make now. Similarly, companies issue a promise to pay back a lender with interest for bonds they issue.
The interest or coupon payments on a bond are periodic payments to the bondholder. These payments can be made with any frequency (even never in the case of zero coupon bonds) but are typically annual. They can be paid back at a consistent rate that stays constant (e.g., 5% each year), a floating rate that changes depending on an index (e.g., LIBOR + 3%), or an inflation-linked rate that is pegged to the rate of inflation (e.g., CPI + 3%).
Bonds are valued in the same way as stock, by discounting the cash flows from principal and interest to present value, taking into account the risk that the interest and principal may not be paid back.