Unlike stocks, which are equity instruments, bonds are debt
instruments. in effect, you’re loaning the bond issuer money, which they repay
with interest.
When bonds are first issued, the investor/lender typically
gives the company $1,000, upon which the company promises to pay a certain
interest rate every year, called the coupon rate, and then repay the $1,000
loan when the bond matures, at the maturity date. for example, general electric
(ge) could issue a 30-year bond with a 5% coupon. The investor/lender gives ge
$1,000; every year the lender receives $50 from ge, and at the end of 30 years
the investor/lender gets their $1,000 back.
Bonds differ from stocks in that they have a stated earnings
rate and will provide a regular cash flow, in the form of the coupon payments
to the bondholders. This cash flow contributes to the value and price of the
bond, and affects the true yield (or earnings rate) bondholders receive; there
are no such promises associated with common stock ownership.




