A bond is a type of interest-bearing security issued by an organization that needs funds. The issuer—a corporation, governmental agency, or municipality—compensates the bondholders by paying interest for the life of the bond. At maturity, the bondholder will be repaid for the funds lent. Maturity dates vary, but bonds are most commonly used for long-term debt. The discussion here will focus primarily on such long-term bonds. Corporate bonds and government bonds from the perspective of issuers will be introduced first. Investing in bonds from the point of view of individuals will be discussed later.

Corporate Bonds

Most corporate bonds are sold in $1,000 denominations. This $1,000 is the par (or face) value of the bond. When bonds are issued, the actual price paid by the bondholder may be the par value (face value) or an amount below (referred to as issued at a discount) or above (referred to...