What is a bond?

A bond is a promise made by a borrower to pay back a lender the amount borrowed (face value) at the bond's maturity date, plus periodical interest payments.

In essence, it's when one party borrows from another, and promises to pay back the amount at a later date, along with interest payments along the way (called annuities).

When working with bonds, you might be prompted with a base-line situation like this:

Scenario: Your lemonade stand is doing well, and you want to expand your capital to produce more lemonade. In order to do so, you take out a 5-year bond from your local bank for $1,000 at a 5% stated annual interest rate.

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