What is a bond?

A bond is a financial instrument that represents a loan made by an investor to a borrower, typically a corporation or government. When a person purchases a bond, they are essentially lending their money to the issuer in exchange for periodic interest payments and the return of the bond's face value upon maturity. This form of investment is considered a debt security, as the investor is acting as the lender, while the issuing entity is the borrower that commits to paying back the principal along with interest over a specified period.

In contrast to equity investments, where individuals buy shares of a company's stock and thus acquire ownership, bonds are strictly a lending arrangement. Additionally, while diversification is a critical investment strategy, it does not specifically define what a bond is. Lastly, bonds are not a financial plan for retirement but can be a component of a broader investment strategy to generate income as part of retirement planning.