Final answer:
A bond is a fixed-income investment in which an investor loans money to an entity at fixed or variable interest rates for a predetermined time period. Corporate bonds, municipal bonds, state bonds, and Treasury bonds are common types, each with their own issuer such as firms, cities, and government bodies.
Step-by-step explanation:
A bond is an investment vehicle wherein an investor lends money to a borrower (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.
Corporate bonds are issued by firms while municipal bonds are issued by cities. There are also state bonds issued by U.S. states and Treasury bonds issued by the federal government through the U.S. Department of the Treasury. The bond specifies the amount borrowed, the interest rate at the time of issuance, and the maturity date—the date upon which the borrower must pay back the amount borrowed, plus interest.
Investors earn returns on bonds through regular interest payments, typically semi-annual, based on the bond's coupon rate. The bond's face value is repaid to the investor at maturity. The present value of a bond is calculated based on its face value, interest rate, maturity date, and current market interest rates, representing the maximum price a buyer would be willing to pay for the bond.