Bond

The generic name for a tradable loan security issued by governments and companies as a means of raising capital. The bond guarantees its holder both the repayment of capital at a future specified date (the maturity date) and a fixed rate of interest (also known as the coupon). Government bonds are known as gilts or Treasury Stock. Bonds offer the greatest certainty of income, (some bond issuers might default on payments) but may fail to keep pace with inflation. You only know exactly how much your bond is worth if you plan to hold it to maturity (when you will be paid back the face value). But in the time between issue and maturity, a bond's value can be volatile, so if you plan to sell before maturity you run the risk of capital erosion. When a bond's price falls, the yield - the income expressed as a percentage of the capital value - rises, and vice versa. In general: bond prices fall when interest rates go up (because the interest rate rise attracts money out of bonds into cash) and when inflation rises (as investors worry that bonds will not bring enough income to keep pace with inflation).