Bond

Picture a friend borrowing 10,000 won and writing on a slip of paper, "I'll pay you back next week with 100 won in interest." A bond is that kind of IOU, except a huge organization like a government or big company issues it on a large scale to lots of people.

When a government builds a highway or an airport, or a company builds a big new factory, it needs hundreds of billions of won or more. It's hard to borrow that much from just a few banks. So they borrow small amounts from many ordinary investors instead.

So the issuer slices its debt into small certificates and sells them on the market to raise money. The moment you buy one, you become a creditor who has lent money to the issuer.

The certificate clearly lists the borrowed amount (the principal), the maturity date, and when and how much interest will be paid. The investor collects the promised interest on set dates. At maturity, they get the full principal back.

The basic way to use a bond is to hold it until maturity and collect the promised interest. But even before maturity, you can freely buy and sell it to others at the market price, like a stock.

The biggest factor that sets a bond's trading price is the market interest rate. Imagine you hold a bond that pays 5% a year, and then bank savings rates drop to 2%. People would line up to buy your bond, which pays far more than the bank, and would even pay extra for it.

Naturally, your bond's value (its price) rises above where it started. On the other hand, if bank rates jump to 7%, your 5% bond looks less attractive and its price falls. More precisely, there's a seesaw relationship: when market interest rates go up, bond prices go down, and when rates go down, bond prices go up.

Because of this, investors don't only chase the interest at maturity. When they expect market rates to fall, they buy bonds early and sell them after the price rises, making a trading profit.

Both put your money into a company, so it's easy to think stocks and bonds are alike. But they differ a lot, starting with the legal position the investor stands in.

When you buy a stock, you get an ownership stake and become a shareholder. If the company earns a lot, you can get big dividends and the share price can jump many times over. But you also share the risk: if the company goes bankrupt, you could lose your entire investment.

When you buy a bond, you become a creditor who has lent money to the company. That's usually a lower-risk position than a stock. Even if the company posts record profits, your interest stays at the rate promised at the start. But as long as the company doesn't fail, you steadily get back the promised principal and interest.

There's also a key difference if the company shuts down. When the company's leftover assets are sold off to pay its debts, the law guarantees a priority: creditors who hold bonds get paid before shareholders.