For companies and governments, a very common way is to issue Bonds to finance some projects and operations. An issuer offers interest (coupon) as a monthly payment to a lender and repays the principal (face value) at the maturity date.
So, a bond is like a form of a loan, where an issuer is a borrower and a bondholder is a lender. The bond agreement includes the end date when the principal of the loan should be paid to the bond owner and usually includes the terms for variable or fixed interest payments made by the borrower.
Bonds can be issued by governments or by corporations. This is a very common way of raising capital. Governments mostly need funds for infrastructures, roads, schools, etc. What about corporations? They use these funds to grow their business, buy assets or start some new projects. A bond provides many individuals with the opportunity to be involved in the investing process.
Bond’s coupon rate (interest rate) mostly depends on two features – credit rating of issuer and time of maturity. A poor credit rating is a risky investment, it means the risk of default is bigger than usual, so this bond issuer will pay more interest. Also, the interest rate is higher when the bond has a long maturity date. This is also explained by inflation risk in the future bond market.