How does a bond function as an investment?

A bond functions as an investment primarily because it is a debt security that pays periodic interest. When an investor buys a bond, they are essentially lending money to the issuer, which could be a corporation or a government. In return for this loan, the issuer agrees to pay the investor regular interest payments, known as coupon payments, at specified intervals, and to repay the principal amount, or face value, of the bond when it matures.

This arrangement provides investors with a predictable income stream, which is an appealing feature for those looking for stability and regular cash flow from their investments. As bonds typically have fixed interest payments, they are often viewed as less risky compared to equities, making them attractive for risk-averse investors or those looking to diversify their portfolios.

In summary, the essence of a bond's function as an investment lies in its nature as a debt security with the promise of periodic interest payments and the return of principal, which distinguishes it from other financial instruments such as stocks or currencies.