ELI5: What is a bond and how does it work?

A bond is an official promise note that someone gives you when they borrow your money, promising to pay it all back later while paying you a little extra reward along the way.

Imagine your friend Timmy wants to build a really cool lemonade stand, but he does not have enough money to buy the lemons and wood. You have ten dollars in your piggy bank, so you decide to help him out.

Instead of just handing him the money, you and Timmy make a deal on a piece of paper:

• The Principal: This is the ten dollars you lend Timmy today.
• The Maturity Date: This is the day in the future, maybe next summer, when Timmy promises to return your ten dollars.
• The Interest or Coupon: Because you are being nice and waiting a whole year to get your money back, Timmy agrees to give you one shiny quarter every single month as a "thank you" fee.

In everyday life, adults do this same thing, but on a much bigger scale:

• The Borrowers: Big companies or governments (like your city) need lots of money to build things like schools, bridges, or new playgrounds.
• The Lenders: Everyday people lend them money by buying their bonds.
• The Result: The city builds the school, pays the people small reward payments every few months, and eventually pays back the full amount of borrowed money on the promised date.