A bond is a contract between an entity that borrows money and a creditor that lends it to the entity. When you purchase a bond, you are effectively giving a loan to the bond issuer. With government bonds, also known as sovereign bonds, a national government borrows money to fund its operations. The bond specifies what interest rate (coupon) will be paid and at which times during the life of the bond and when the principal funds, also known as face value, will be returned. This is called the maturity date. Bonds are an asset class by themselves that offers more stability than stocks.
The return on a bond is known in advance, which makes them low risk investments, although the risk is related to the credit rating of the bond issuer. If the coupon rate is higher than the prevailing interest rates, a bond becomes attractive so the demand for these bonds will increase, driving up their price. If the bond interest is lower than the prevailing interest rates, their price will drop, so bonds are inversely correlated to interest rates.
