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What are bonds?

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Bonds, also known as fixed income, are a form of debt and one way a company funds itself; the other is shares. Governments also issue bonds as an additional income stream to raising money from taxes.

When an institution lends to a government or company in the form of a bond, they will receive a fixed payment also known as a coupon, for the fixed number of years the bond is in issue. This is the interest rate charged to the borrower. At the end of the fixed period, say 5 or 10 years, the whole amount or principal will be paid back.

Bonds are safer than stocks because bondholders get paid before shareholders if the company is liquidated, the price tends to be more stable, and the income stream is fixed for a defined period of time.