Depending on which side of the equation you’re on, bonds can be either a loan or debt. Bonds essentially are loans that investors make to corporations and governments. They are also known as fixed-income investments because the corporation or government that borrows the money and issues the bond typically pays the bond investor (the lender) a fixed amount of interest over a pre-defined period of time.
At the end of the term, the corporation of government pays back the original investment (the principal) to the investor. All bonds have a face value (the price of the bond), and a coupon, which is the annual rate of the interest the bond pays. For example, an investor who buys a bond with a face value of $1,000 and a coupon of 4% will pay $1,000 for the bond and receive $40 in interest payments each year for the length of the term.
Because investors get back their original investment, there is a reduced amount of risk involved in bond investing. Subsequently, the amount of interest represented by the coupon rate is generally lower than the historical returns generated by equity (stock) investing.