Bond Basics
Simply put, a bond is a debt instrument. The issuer needs to pay interest to the bond holder at a pre-set rate on a regular basis and repay the invested principal on a specific date.
In other words, when an investor purchases a bond, he is effectively lending money to the issuer, which is typically a government, a private company, a supranational organisation or another type of agency. The issuer must promise, in the terms of the issuance, that it will pay interest at the pre-determined rate (i.e. coupon rate) during the lifespan of the bond, and repay the face value of the bond, which means the sum originally invested, on maturity.
The term of a bond, defined at the time of issuance, is referred to as tenor or maturity. In general, the longer the maturity, the higher the coupon rate will be. Short-dated bonds usually have a maturity of up to two years, while for medium-term bonds it is 2 to 10 years; bonds with maturity longer than 10 years are defined as long-term bonds.