--- title: What is a Bond? | Categories, Characteristics, Price, Varieties, Benefits description: A bond can be defined as fixed income security that represents a loan by an investor to a borrower. Click for more information. --- [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo-white.4f6047d4.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) [![Carbon collective](https://www.carboncollectiveinvesting.com/hubfs/raw_assets/public/CarbonCollective_August2021%20copy/images/carbon-collective-green-investing-logo.53b28bee.svg "Carbon collective")](https://www.carboncollectiveinvesting.com/) - About - Employers - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - [401(k) Comparison Tool](https://www.carboncollectiveinvesting.com/401k/plan-comparison-tool) - Individuals - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [ETF](https://www.carboncollectivefunds.com/) - Learn - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Blog](https://blog.carboncollective.co/) - [Tools](https://tools.carboncollective.co/calculator/) - Log in - [Carbon Collective](https://app.carboncollective.co) - [Altruist](https://app.altruist.com) [Talk to a human](https://ask.carboncollective.co/f4o5dylkg) [Sign up](https://app.carboncollective.co/sign-up) [Log In](http://app.carboncollective.co/) **[Home](https://www.carboncollectiveinvesting.com/) > [Sustainable Investing](https://www.carboncollectiveinvesting.com/sustainable-investing) >** What is a Bond? # What is a Bond? ![](https://www.carboncollectiveinvesting.com/hubfs/Brooke%20Tomasetti.png) Written by Brooke Tomasetti | Reviewed by [Subject Matter Experts](https://www.carboncollectiveinvesting.com/subject-matter-experts) Updated on October 1, 2024 Fact Checked Why Trust Carbon Collective? ### Table of Contents A bond can be defined as fixed income security that represents a loan by an investor to a borrower. Bonds are one of the three asset classes that investors are familiar with along with equity and cash equivalents. A contract is set up detailing what the borrower needs to pay on the bond's face value. It will also contain details about the end date and the terms of the variable or fixed interest payments. Bonds are normally issued in denominations of $500 or $1000. ## Bond Categories There are four categories of bonds sold in the markets: - **Corporate bonds** are issued by companies that seek funding, rather than using loaning money from a bank they issue bonds. Bonds offer more favorable terms and lower interest rates for the companies. - **Municipal bonds** are issued by the states and municipalities the bonds are offered with a tax-free coupon income to investors. - **Government bonds** are issued by the government; the bonds issued by national governments are referred to as sovereign debt. - **Agency bonds** are issued by government-affiliated organizations. ## Characteristics of Bonds Most bonds share some basic characteristics including: ### Face Value **Face value** is the amount that the bond will be worth at maturity. Bond issuers use the face value of the bond to calculate the interest payments. **For example,** if a bond has a face value of $1000 a buyer purchases the bond at a premium of $1050. The same bond is bought by a different buyer a few months later at a discounted price of $950. At the maturity of the bond, both investors will receive $1000 which is the face value of the bond. ### Coupon Rate **The coupon rate** is the interest rate of the bond, this interest is calculated on the face value of the bond. The interest rate is expressed as a percentage. **For example,** a $1000 face value bond with an 8% coupon rate is issued. What amount of interest will the bondholders receive? ![1-Apr-24-2022-02-31-21-11-AM](https://www.carboncollectiveinvesting.com/hs-fs/hubfs/1-Apr-24-2022-02-31-21-11-AM.png?width=1456&name=1-Apr-24-2022-02-31-21-11-AM.png) ### Coupon Date **Coupon dates** are the dates on which interest payments will be made. Interest payments can be made at different intervals, but the standard is semi-annual payments. ### Maturity Date **The maturity date** is the date at which the face value of the bond will be paid out to the bondholder. ### Issue Price **The issue price** is the price that the bond was originally sold for. ## Market Price of a Bond The market price of a bond depends on numerous factors: - **The credit quality of the issuer** – the credit rating of a company’s bond is determined by credit rating agencies.  A company can have a high or low credit rating. Very high-quality bonds are issued by stable companies and they are called investment-grade bonds. If the credit quality of the issuers is poor, then it increases the risk of the bond these bonds are called high yield or junk bonds. The bonds will pay a higher interest rate due to the risk. - **Time until expiration** – Bonds with very long expiration dates are considered riskier. Higher interest rates will be paid to the bondholder because the bond is exposed longer to fluctuating interest and [inflation rates](https://www.carboncollectiveinvesting.com/sustainable-investing/inflation-rate/). - **The coupon rate** will be compared to the general interest rate at the time of issuing the bond. You can use our [bond value Excel spreadsheet](https://www.carboncollectiveinvesting.com/sustainable-investing/bond-value-excel-template/) to calculate your bond pricing, valuation, and yield. ## Varieties of Bonds The bonds available for investors come in different varieties. They are separated by the rate, type of interest, or the coupon payment of the bond. Let’s discuss the varieties of bonds: - **Zero-coupon bonds** – are issued at a discounted value, they do not pay any coupon payment. The bondholder gets a return when the bond matures, and the face value is paid out. - **Convertible bonds** – allow the bondholders to convert their debt into equity depending on certain conditions. **For example,** a company needs $2 million to fund a new expansion project. The company can issue bonds with a 10% coupon rate that matures in 10 years. The alternative is to issue a 6% coupon with the ability to convert the bond into equity if the price of the stock rises above a certain value. If the company issues the 6% convertible bonds the company will pay lower interest rates at the start of the project which could be beneficial. If the investors convert the bonds to equity the shareholders will be diluted but the company would not have to pay the higher interest rate on the bond principal. - **Callable bonds** can be called back by the company before their end date. A callable bond is considered a riskier investment. **For example**, a company borrows $2 million by issuing a 12% coupon rate, a callable bond that matures in 10 years. The interest rate declined in year 4 and the company can now borrow at 10%. The company can then call back all the bonds at the face value and reissue new bonds with a 10% coupon rate. - A **Puttable bond** – lets the bondholders sell back the bond to the company before maturity. Investors that are worried about the value of their bonds falling or interest rates rising could then get their principal amount back. ## Pricing Bonds A bond can be issued at a discount or premium price depending on the market interest rate. The bondholder will pay the face value of the bond. The bond will then be paid back at maturity with monthly, semi-annual, or annual interest payments. A bond’s price will change daily a bondholder doesn’t have to keep their bond until maturity, the bonds can be sold on the open market. The price of the bond will change due to a change in the interest rate of the economy. Way of considering a bond’s price: - **Inverse to Interest Rates** – a bond’s price will vary inversely to the interest rate. When interest rates decrease the bond prices will rise to have an equalizing effect on the interest rate of the bond. **For example –** a 10% coupon rate, a $1000 bond is issued, and the price goes down to $800. The yield will go up to 12.5% this is since you are guaranteed $100 on an asset that is now worth $800. ![2-Apr-24-2022-02-31-40-58-AM](https://www.carboncollectiveinvesting.com/hs-fs/hubfs/2-Apr-24-2022-02-31-40-58-AM.png?width=1455&name=2-Apr-24-2022-02-31-40-58-AM.png) If the price of the bond goes up to $1200 the yield will decrease to 8.33%: ![3-Apr-24-2022-02-31-50-24-AM](https://www.carboncollectiveinvesting.com/hs-fs/hubfs/3-Apr-24-2022-02-31-50-24-AM.png?width=1458&name=3-Apr-24-2022-02-31-50-24-AM.png) - **Yield-to-Maturity (YTM) –** is the total return anticipated on a bond that is held until the end of its lifetime. The yield-to-maturity is a complex calculation that is calculated by using a computer. We also have a [YTM calculator](https://www.carboncollectiveinvesting.com/sustainable-investing/yield-to-maturity/#3-yield-to-maturity-calculator) you can use.   ![4-Apr-24-2022-02-32-04-58-AM](https://www.carboncollectiveinvesting.com/hs-fs/hubfs/4-Apr-24-2022-02-32-04-58-AM.png?width=1425&name=4-Apr-24-2022-02-32-04-58-AM.png)   - **Duration** – measures the anticipated change in a bond price given a change in the interest rate. The duration can be calculated by determining the price sensitivity to the interest rate changes of a bond. Bonds with long maturities and low coupon rates have a great sensitivity to interest rate changes. ## Bond Benefits Bond financing has three benefits: - Bonds do not affect the ownership of a company whereas equity financing does. Issuing bonds will not dilute company shares. - Interest expenses on a bond are tax-deductible meaning even though you are incurring interest expenses in financing the bonds you can deduct the money from tax. Equity financing doesn’t provide any tax advantages. - Financial leverage – when finance a bond and the bond earns you a return on equity it is financial leverage. If a company invests the proceeds from the bond at a higher interest rate than the interest payments on the bond, then the company will make money on issuing the bond. ## Bond Example A bond is issued with a face value of $1000 and a coupon rate of $8. The bondholder will get $80 interest annually if nothing changes the bond will remain at its face value. The interest rate begins to decrease, and the company issues a similar bond with a face value of $1000 and a coupon rate of $5. The bondholder will get $50 of interest annually, making the initial bond more valuable. The investors would want the higher interest rate bonds, they will have to pay extra to convince a current bond owner to sell their bonds. New investors will pay an amount above the face value to purchase the initial bonds, raising the price of the bond and thus decreasing the yield of the bond If the interest rate rises from 8% to 10% then 8% coupons are no longer attractive to buyers. This will decrease the bond's price and the bond will be sold at a discounted price. ## Bond Conclusion - A bond can be defined as fixed income security that represents a loan by an investor to a borrower. - There are four categories of bonds sold in the markets: - Corporate bonds - Municipal bonds - Government bonds - Agency bonds - Most bonds share some basic characteristics including: - Face value - The coupon rate  - Coupon dates  - The market price of a bond depends on numerous factors: - The credit quality of the issuer - Time until expiration - The coupon rate - Varieties of bonds - Zero-coupon bonds - Convertible bonds  - Callable bonds  - A Puttable bond  - Way of considering a bond’s price: - Inverse to Interest Rates - Yield-to-Maturity (YTM) - Duration - Bond financing has three benefits: - Bonds do not affect the ownership of a company - Interest expenses on a bond are tax-deductible - Financial leverage ## FAQs ### 1. What is a bond? A bond is a fixed-income security that represents a loan by an investor to a borrower. ### 2. Who are the issuers of bonds? The issuers of bonds can be a company, municipality, or government. ### 3. What are the characteristics of bonds? Some of the characteristics of bonds include the face value, coupon rate, and maturity date. ### 4. What are the types of bonds? There are four categories of bonds: corporate, municipal, government, and agency. ### 5. What are the benefits and risks of bonds? Bonds offer benefits such as tax deductions and financial leverage, but also come with risks such as default. ### Related Topics - [Sustainable 401(k) Plan](https://www.carboncollective.co/401k) - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing/) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - [Retirement Glossary](https://www.carboncollective.co/sustainable-investing/retirement-planning-glossary) - [Best Retirement Plans](https://www.carboncollective.co/sustainable-investing/the-10-best-retirement-plans) - [Wealth Manager Vs Financial Advisor](https://www.carboncollective.co/sustainable-investing/wealth-manager-vs.-financial-advisor) ![Attend Our Next Webinar](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-webinar.12af7b6e.svg) ### Attend Our Next Webinar Join our next Sustainable Investing 101 webinar, get our favorite DIY options, and walk through how we build our portfolios. [Watch Now](https://www.carboncollective.co/sustainable-investing-webinar-green-retirement-month) ![Get Our Newsletter](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-demo.6ed28722.svg) ### Get Our Newsletter Go a level deeper with us and investigate the potential impacts of climate change on investments like your retirement account. Join Newsletter ![close-typeform](data:image/gif;base64,R0lGODlhEQARAIAAAODn7P///yH5BAEHAAEALAAAAAARABEAAAIqBIKpab3v3EMyVHWtWZluf0za0XFNKDJfCq5i5JpomdUxqKLQVmInqyoAADs=) ![Talk To A Human](https://www.carboncollectiveinvesting.com/hubfs/carbon-collective-green-investing-icon-chat.49d48c5b.svg) ### Talk To A Human Joining a new investment service can be intimidating. We’re here for you. Click below to email us a question or book a quick call. [Ask a Question](https://ask.carboncollective.co/f70pooobq) Topics ## Sustainable Investing Topics View our list of some topics below. See More - Portfolios - [Performance](https://www.carboncollectiveinvesting.com/returns) - About - [Sustainable 401(k)](https://www.carboncollectiveinvesting.com/401k) - Learn - [FAQ](https://www.carboncollective.co/en/knowledge/faqs) - [Sustainable Investing](https://www.carboncollective.co/sustainable-investing) - [Investing Basics](https://www.carboncollective.co/sustainable-investing/investing-basics) - Contact - [Contact us](mailto:hello@carboncollective.co) - [Legal](https://www.carboncollective.co/legal) - [Privacy Policy](https://www.carboncollectiveinvesting.com/hubfs/2022-11%20Carbon%20Collective%20Privacy%20Policy.pdf) - [Back to top](https://www.carboncollectiveinvesting.com/sustainable-investing/bond#top-of-page) DISCLAIMERS: Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective"), an SEC-registered investment adviser. A copy of Carbon Collective's current written disclosure statement discussing Carbon Collective’s business operations, services, and fees is available at the SEC’s investment adviser public information website – [www.adviserinfo.sec.gov](https://adviserinfo.sec.gov/firm/summary/310129) or [our legal documents here](https://blog.carboncollective.co/legal-documents/). The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. Carbon Collective does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Carbon Collective’s web site or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Investments in securities: Not FDIC Insured • No Bank Guarantee • May Lose Value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Carbon Collective's charges and expenses. Carbon Collective's internet-based advisory services are designed to assist clients in achieving discrete financial goals. They are not intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation and do not incorporate specific investments that clients hold elsewhere. For more details, see our Form CRS, Form ADV Part 2 and other disclosures. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Carbon Collective is not registered. © 2026 Carbon Collective Corporation. All rights reserved. × #### Fact Checked Carbon Collective partners with financial and climate experts to ensure the accuracy of our content. Our team of reviewers are established professionals with years of experience in areas of personal finance and climate. They have contributed to top tier financial publications, such as Reuters, Axios, Ag Funder News, Bloomberg, Marketwatch, Yahoo! Finance, and many others. This team of experts helps Carbon Collective maintain the highest level of accuracy and professionalism possible. × #### Why Trust Carbon Collective Carbon Collective is the first online investment advisor 100% focused on solving climate change. We believe that sustainable investing is not just an important climate solution, but a smart way to invest. We follow ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. Much of our research comes from leading organizations in the climate space, such as Project Drawdown and the International Energy Agency (IEA). Our goal is to deliver the most understandable and comprehensive explanations of climate and finance topics. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others. We strive to empower readers with the most factual and reliable climate finance information possible to help them make informed decisions. } ```json { "@context" : "https://schema.org", "@type" : "Organization", "alternateName" : "Carbon Collective", "contactPoint" : { "@type" : "ContactPoint", "areaServed" : "US", "availableLanguage" : "en", "contactType" : "customer service", "telephone" : "(650) 868-2697" }, "logo" : "https://www.carboncollective.co/hubfs/CarbonCollectiveLogo.png", "name" : "Carbon Collective Investing LLC", "sameAs" : [ "https://www.facebook.com/carboncollectiveinvesting/", "https://twitter.com/carbncollective", "https://www.instagram.com/carbon.collective/", "https://www.youtube.com/channel/UC769Y-F-L_B37kyQfdpvyXA", "https://www.linkedin.com/company/carbon-collective/", "https://www.crunchbase.com/organization/carbon-collective", "https://adviserinfo.sec.gov/firm/summary/310129", "https://www.wikidata.org/wiki/Q110243690" ], "url" : "https://www.carboncollective.co/" } ``` ```json { "@context" : "https://schema.org", "@type" : "FAQPage", "mainEntity" : [ { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "A bond is a fixed-income security that represents a loan by an investor to a borrower." }, "name" : "What is a bond?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "The issuers of bonds can be a company, municipality, or the government." }, "name" : "Who are the issuers of bonds?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "Some of the characteristics of bonds include the face value, coupon rate, and maturity date." }, "name" : "What are the characteristics of bonds?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "There are four categories of bonds: corporate, municipal, government, and agency." }, "name" : "What are the types of bonds?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "Bonds offer benefits such as tax deductions and financial leverage, but also come with risks such as default." }, "name" : "What are the benefits and risks of bonds?" } ] } ``` ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "https://20345524.fs1.hubspotusercontent-na1.net/hubfs/20345524/Brooke%20Tomasetti.png", "url" : "https://www.carboncollectiveinvesting.com/sustainable-investing/author/brooke-tomasetti" }, "dateModified" : "2024-10-01", "datePublished" : "2021-03-24", "description" : "A bond can be defined as fixed income security that represents a loan by an investor to a borrower. Click for more information.", "headline" : "What is a Bond? | Categories, Characteristics, Price, Varieties, Benefits", "image" : "", "mainEntityOfPage" : { "@id" : "https://www.carboncollectiveinvesting.com/sustainable-investing/bond", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://www.carboncollective.co/hubfs/CarbonCollectiveLogo.png" }, "name" : "Carbon Collective" } } ```