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A Bond is a debt security, in which purchasing a bond is nothing but lending money to an authorized issuer for a specific period at a specific rate of coupon (interest). It is a formal contract to repay borrowed money with interest at fixed intervals (semi annually, annually, sometimes monthly). Thus a bond is like a loan, 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 provide the borrower with external funds to finance long-term investments or in case of government bonds, to finance current expenditure. Govt. of India is the biggest issuer of Bonds. Bond market is much bigger than equity market.

Interests earned from bonds are taxable & includes in your Interest income. Bonds after certain period of time get indexation benefits. Bonds are generally used by investors to offset some of the risk in their portfolio. So, by adding bonds to your portfolio you can mitigate some of the risk you’re taking in stocks by having stable income from bonds.