A bond is simply a loan that one entity issues to another. The investor may loan a certain amount for a period of time on a fixed or variable interest basis. Typically, bonds are taken out by companies wanting to raise funds for projects or sustain operations.
For example…
Take Furniture Kingdom Incorporated, they need to finance their new line of business which is expanding into playground equipment. Instead of taking out a loan from the bank, they issue bonds to an investor at the current interest rate of four percent to the face value of one hundred thousand dollars. If the interest rate remains the same, the bondholder gets four thousand dollars annually, if it falls to say one percent, this figure will fall to one thousand dollars.
