When an investor buys a bond from a company, she loans the company money in exchange for an agreement to pay interest on the money and return the borrowed amount at a specified time. The coupon rate, also called the coupon, is the yearly interest rate payout on a bond that is communicated as a percentage of the value of the bond. Some bonds, called zero coupon bonds, are issued for less than face value and assigned no coupon rate. Instead of periodic interest payments based on the coupon rate, the higher face value is repaid at the end of the time period assigned to the bond.
A bond is an investment security that signifies a loan between a lender and a borrower. It is essentially a promise to repay the loaned money, called the principal of the bond. A bond usually includes an interest payment defined by the coupon rate on the bond. The borrower issuing a bond is usually a company, and a lender can be a private party or securities brokerage purchasing the bond.
Both stocks and bonds are securities that allow investors to put money into businesses they believe will profit. Though stocks are at risk of stock market crashes and large fluctuations in the market, stockholders always get the money for the stocks and dividends they earn. Receiving the agreed-upon coupon rate and principal payments on a bond depends on the ability of a company to meet its financial obligations, so a bond buyer must choose to loan money carefully based on the creditworthiness of the recipient. Bonds differ from stocks because they have a fixed rate of return based on the coupon rate of the bond, as well as a fixed date when the bond contract ends.
More common in fiction than in recent financial trading, bearer bonds, also known as bearer certificates, are bonds issued to the person who physically holds the bond. An asset to investors who wish to keep investments anonymous, the issuing entity of a bearer bond does not usually keep a record of the bond or the identity of the buyer. Bearer bonds were so named because they were often issued to a nameless "bearer," meaning that the value of the bond belongs to the person physically holding it. Because their existence is basically off the record, these bonds often require that a bond holder makes a diligent effort to receive coupon rate payments. If a bearer bond is stolen or destroyed, it most likely cannot be traced or replaced.
The lack of record keeping typical of the bearer bond is in sharp contrast with the more common registered bond. When a registered bond is purchased, the company issuing the bond records the name of the buyer alongside an identifying number that ties the buyer to the bond. Registered bonds are less dependent on the physical paper bond because records allowing the replacement of a lost, stolen or destroyed registered bond can easily be located.