bond

A debt security issued to raise money from investors. The issuer promises to pay a specified rate of interest for the set life of the bond and to repay the principal when it comes due. The three main types of bonds are corporate, municipal and U.S. Treasury. Investment-grade corporate bonds have a higher credit rating (less risk of default). High-yield corporate bonds have a lower credit rating, implying higher credit risk; they offer a higher rate of interest in return for the increased risk. Municipal bonds, called “munis,” are issued by states, cities, counties and other government entities. U.S. Treasury bonds, notes and bills are backed by the federal government. Bond risks include credit risk, interest rate risk, inflation risk, liquidity risk and call risk.