A bond is a loan in securities format. Whereas a loan is a bilateral contract between a lender and a borrower, a bond is a tradeable instrument, an IOU which can be bought and sold in the market. The borrower borrows money by selling bonds to lenders/ investor, who can hold on to or on-sell the bond to other investors. The borrower will pay interest and principal payments to whoever holds the bond at the time.
Fig 1. Bond cash flows of a 5 year fixed coupon bond.
Key concepts
Principal: the notional of the loan.
Maturity: the end date when repayment of principal is due.
Coupon: the periodic interest rate due on the loan.
Coupon tenor: the periodic interval (typically every 6 or 12 months) between coupon payments.
Price: the market price an investor pays for the bond at any given time.
Yield to Maturity/ Internal Rate of Return: the return an investor will achieve if the bond is held to maturity and all cash flows take place as expected.