A bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals. A bond is therefore a form of loan or “I owe you”. The holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.

Bonds and stocks are both securities, but the major difference between the two is that shareholder have an equity stake in the company (i.e. they are investors), whereas bondholders have a creditor stake in the company (i.e. they are lenders). Being a creditor, bondholders have absolute priority and will be repaid before stockholders (who are owners) in the event of bankruptcy.