A bond is a loan, not a share of ownership: when you buy one, you lend money to the issuer on published terms.
Face value, interest rate and maturity describe what the issuer owes: the price you actually pay can be higher or lower than face value.
The stated interest rate is not your full return: your purchase price, sale price or repayment, and costs all affect the result.
Holding to maturity does not remove every risk: the issuer can still pay late or fail to pay, and selling early adds price and liquidity risk.
What is a bond?
A bond is a type of debt security. When you buy a bond, you lend money to the issuer under terms it has published. You are not buying a piece of the organization, as you would with a share.
The issuer is obliged to pay interest and repay the principal (the original amount borrowed) according to the bond's terms. But an obligation to pay is not the same as a certainty of being paid. A borrower can still pay late or become unable to pay at all.
How does a bond work?
Think of a bond as a large loan split into smaller pieces, each with clearly written conditions. A company or a government raises money, and each bondholder owns the right to receive the payments set out in the terms of issue.
Three basic terms to understand
Face value (par value): the nominal amount used to calculate interest on bonds that pay interest based on face value. For a bond that repays its principal in one lump sum, it is also the amount that must be repaid at maturity.
Interest rate and payment schedule: these tell you how interest is calculated and when it is paid. The rate can be fixed or floating, and not every bond pays interest at regular intervals.
Maturity date: the date on which repayment of the principal falls due under the terms. It is not a guarantee that the borrower will have the money on that day.
The purchase price is what you actually pay to own the bond. It can differ from face value, especially if you buy the bond from another investor rather than from the issuer. So keep two numbers separate: the money you put in, and the principal written in the terms.
Example: interest and principal
Suppose a bond has a face value of VND 1,000,000, a fixed interest rate of 6% a year, pays interest once a year and repays all of its principal after three years. The buyer pays exactly face value and holds the bond until maturity.
End of year one: interest due under the terms is VND 60,000.
End of year two: interest due under the terms is VND 60,000.
End of year three: interest of VND 60,000 plus the VND 1,000,000 principal fall due.
This is a hypothetical example to help you read a bond's cash flows. It is not a product on offer or a recommended return. The payments only happen as described if the issuer meets all of its obligations, and the example ignores fees, taxes and reinvesting the interest.
How are bonds different from stocks?
When you own a stock, you own part of a company. When you own an ordinary corporate bond, you are a creditor. Buying the bond does not make you a shareholder.
Shareholders can benefit when a company grows, but dividends are not guaranteed. Bondholders have a contractual right to the payments set out in the terms. If the company's profits rise, the interest on a fixed-rate bond does not rise with them.
If a company goes bankrupt, bondholders usually rank ahead of shareholders for repayment. How much they actually recover still depends on what assets are left, the bond's terms and the order of priority among different creditors. Ranking ahead does not mean getting all of your money back.
Is a bond's interest rate the return you actually earn?
The interest rate in a bond's terms tells you how the interest is calculated. It does not capture the whole result of the investment. Your purchase price, your sale price or the principal you get back, the interest you actually receive and any costs all shape the final outcome.
For example, a bond with a face value of VND 1,000,000 and annual interest of VND 60,000 pays the same interest under its terms whether a later buyer pays VND 950,000 or VND 1,050,000 for it. The two buyers put in different amounts of money, so they do not earn the same rate of return.
The point to remember is that interest and price changes are two separate parts of the result. Do not look at the interest rate alone and assume the investment will earn exactly that figure.
What are the risks of bonds?
The borrower does not pay as promised
The issuer may pay interest late, repay principal late or fail to pay in full. This is credit risk, also called default risk. A high advertised interest rate does not make up for not knowing who owes you the money and whether they can pay.
Prices fall when market interest rates rise
With a fixed-rate bond, when comparable new bonds start paying higher interest, the older bond usually becomes less attractive and its price tends to fall. This is interest rate risk, and it matters most if you need to sell before maturity.
Holding to maturity can spare you from selling at a low market price, but it does not remove the risk that the borrower becomes unable to pay.
Hard to sell, and less purchasing power
Some bonds are hard to sell quickly when you need cash. A quoted reference price does not guarantee you can sell at that price straight away. Inflation can also mean the interest and principal you receive in the future buy fewer goods and services than they would today.
What should you read before judging a bond?
Government bonds and corporate bonds have different parties responsible for repaying the debt. Even within the same group, maturity, payment terms and credit quality can vary. How safe a particular bond is depends on the issuer's ability to repay and on the specific terms, not simply on the fact that it is a bond.
A bond is also not a savings deposit. When a bank or a securities company introduces a bond to you, that does not automatically make it the party guaranteeing your principal and interest.
Before you assess a specific product, try to answer these questions:
Who issues the bond, and who is obliged to pay?
How does the purchase price compare with face value?
How is interest calculated, paid and adjusted?
When is the principal due, and how could you sell if you needed the money earlier?
Which documents describe the issuer's ability to repay, and any collateral or guarantee?
If you cannot answer these questions yet, learning more and reading the product documents is a necessary step. Understanding what a bond is does not by itself give you a reason to buy one. Working out total return and evaluating a specific product are separate skills from recognizing a bond, which is the focus of this lesson.
Next step
Interest is only one part of what you earn from a bond: the price you pay, the price you sell at and your costs also change how much money you end up with. That raises a practical question: how do you put income and price changes together to judge an investment? The next lesson explains total return, so you can look past the advertised interest rate.
Continue the main path: What is total return?
This content is for personal finance education only and does not constitute personalized investment advice. Consider your own goals, time horizon, ability to bear losses, and financial circumstances before investing.