What a bond actually is
A bond is a loan, written down. The borrower (the issuer) — usually a government or a company — promises to pay the lender (you, if you bought it) a fixed schedule of payments over time, then return the original amount at maturity. Three numbers define every plain-vanilla bond:
- Face value (par value) — the principal that gets returned at maturity. Usually ₩10,000, $1,000, or some round number.
- Coupon rate — the percent of face value paid each year as interest. A 5% coupon on a ₩10,000 bond pays ₩500/year.
- Maturity — when the face value gets returned. Could be 1 year, 10 years, 30 years, sometimes more.
So a "5% 10-year ₩10,000 bond" pays ₩500 every year for 10 years and then returns ₩10,000 at the end. Total cash you get: ₩5,000 of coupons + ₩10,000 of face value = ₩15,000 over 10 years. The price you'd pay for that stream is the present value of those payments — the topic of the next two lessons.
Why companies and governments issue bonds
Issuing bonds is one way to raise money. The alternatives are issuing stock (gives up ownership) or bank loans (limited size, restrictive terms). Bonds let an issuer raise large sums from many lenders simultaneously, with predictable repayment terms.
For governments, bonds finance deficits and infrastructure. The US issues Treasuries; Korea issues KTBs; corporate bonds finance everything from factory expansions to acquisitions.
Why you'd buy a bond
Three reasons:
- Income. Coupons provide steady cash flow. Useful for retirees or anyone wanting predictable income.
- Capital preservation. Bonds (especially government bonds) have lower σ than stocks. They protect capital better in crashes — usually.
- Diversification. Bond returns often have low correlation with stock returns (sometimes negative), so a stock+bond portfolio shakes less than stocks alone (Track 9).
Bonds aren't usually the path to wealth — they're the path to not losing wealth. Long-run real returns from bonds are 1-3% historically, vs. 6-7% from stocks. The lower expected return is the price of lower risk.
Categories of bonds
- By issuer: sovereign (government), corporate (company), municipal (cities/states).
- By credit quality: investment-grade (low default risk) vs. high-yield/junk (higher default risk, higher coupons).
- By maturity: short (<3 years), intermediate (3-10), long (10+).
- Special types: zero-coupon (no coupons, sold at discount), inflation-protected (TIPS), floating-rate, callable.
The takeaway
Bond = loan with three defining numbers (face, coupon, maturity). You pay a price today; you receive coupons + face value over time. Issued by governments and companies to raise money. Held by investors for income, capital preservation, and diversification. Lower expected return than stocks but lower σ. Lessons 7-2 through 7-7 cover pricing, yield, sensitivity to rates, and a famous crash.