What a bond is
A bond is a loan you give to a government or a company. The borrower (the issuer) takes your money now and promises to pay it back on a set date. Until then it usually pays you interest.
A share makes you a part-owner of a company. A bond makes you a lender. That changes your rights and your risks. A bondholder has a contract that sets what is owed and when. A shareholder has a claim on profits that may or may not come. For the share side, see What Stocks Are.
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The parts of a bond
| Term | What it means |
|---|---|
| Face value (par) | The amount the issuer repays at the end |
| Coupon | The interest the issuer pays, set as a rate on the face value |
| Coupon frequency | How often the coupon is paid |
| Maturity | The date the face value is repaid and the bond ends |
| Issuer | The government or company that borrowed the money |
| Price | What the bond trades for today. This can be above, at or below face value |
| Yield | The return you get if you buy at today's price |
A fixed-rate bond pays the same coupon until maturity. A floating-rate bond resets its coupon against a benchmark rate, so its payments rise and fall with market rates. A zero-coupon or discount instrument pays no coupon at all. You buy it below face value and receive the full face value at maturity. The gap is your return.
Price versus yield
This is the part that confuses most beginners. When market interest rates rise, the prices of existing bonds fall. When market rates fall, existing bond prices rise.
The reason is competition. Say you hold a bond with a fixed coupon and new bonds start paying a higher coupon. Nobody will pay full price for your bond when a better one is on offer. Its price drops until a buyer would earn about the same yield as on the new bonds. When new coupons fall instead, your older and higher coupon becomes more valuable, and the price rises.
Points an experienced investor watches:
- Yield to maturity is the total return if you buy at today's price, receive every coupon and hold to maturity. It counts the coupons and the gain or loss between price and face value.
- Current yield is just the annual coupon divided by the price. It ignores the gain or loss at maturity.
- Duration measures how sensitive a bond's price is to changes in rates. Longer maturities and lower coupons mean higher duration and bigger price swings.
- Holding to maturity: if the issuer pays in full, price swings along the way do not change what you receive at the end. They matter only if you sell early.
The worked maths is on Bond Prices and Yields.
What moves bond yields in Pakistan
The main driver is the State Bank of Pakistan's policy rate. Banks and other investors price government paper close to it. The latest decision on our record is: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Always check the current rate on the SBP website before you rely on it. For background, see SBP rates and economy.
Inflation matters too. A coupon that looks high can still lose buying power if prices rise faster than the coupon. See Inflation and Savings.
Government bonds in Pakistan
The federal government borrows through instruments that the SBP auctions on its behalf. The main types are:
- T-bills (Market Treasury Bills) are short-term and mature within months. They pay no coupon. They are sold at a discount, and you receive face value at maturity.
- PIBs (Pakistan Investment Bonds) are long-term. They come as fixed-rate PIBs with regular coupons and as floating-rate PIBs whose coupon resets against a benchmark.
- Government Ijara Sukuk are Shariah-compliant certificates backed by government assets. They pay rental income instead of interest. See Islamic finance.
Banks and large institutions dominate the auctions. Individuals usually get access through a bank or a licensed broker, often through a securities account held for them. Access routes, minimum amounts and charges vary by institution. Ask your bank or broker directly.
National Savings certificates and prize bonds are also government borrowing. They work differently: you usually cannot trade them in a market, so their price does not move with rates. They are covered on National Savings schemes and Savings and deposits.
Corporate bonds and credit risk
Companies also issue debt. In Pakistan these are often called Term Finance Certificates (TFCs) or corporate sukuk, and some are listed on the Pakistan Stock Exchange. Trading in listed securities is supervised by the Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers.
Credit risk is the chance that the issuer pays late, pays less or does not pay at all. Domestic government debt in rupees is generally treated as the lowest credit risk in the local market, because the government can tax and borrow to pay. A company has no such backstop. To attract lenders, corporate bonds usually offer a higher yield than government bonds of similar maturity. That extra yield is payment for the extra risk, not free return.
Credit rating agencies grade issuers. A downgrade usually pushes a bond's price down even before any missed payment. In a default, bondholders rank ahead of shareholders, but recovery can be partial and slow.
Other risks to know
- Interest rate risk: rising rates lower the price of bonds you already hold.
- Liquidity risk: some bonds, especially corporate ones, trade rarely. Selling before maturity can mean accepting a lower price.
- Reinvestment risk: when rates fall, coupons and repaid principal can only be reinvested at lower yields.
- Inflation risk: fixed payments lose real value when prices rise.
- Tax: withholding tax may apply to bond income. Rules change, so check the current position. See Payments, tax, Islamic banking.
Where bonds fit
Bonds are one building block alongside deposits, shares and funds. Many people hold them through mutual funds instead of buying individual bonds. See Mutual Funds, Asset Allocation and Diversification. This page explains how bonds work. It does not recommend any instrument.
Frequently asked questions
What are bonds in simple words?
A bond is a loan to a government or company. You receive interest (the coupon) and get your money back at maturity, as long as the issuer pays.
What is the difference between T-bills and PIBs in Pakistan?
T-bills are short-term and sold at a discount with no coupon. PIBs are long-term and pay a fixed or floating coupon.
Why does a bond's price fall when rates rise?
New bonds then pay more. An older bond with a lower coupon must get cheaper to offer a buyer a comparable yield.
Can I lose money on government bonds?
Yes, if you sell before maturity after rates have risen, or if inflation outpaces your return. Holding to maturity removes the price risk but not the inflation risk.
Are corporate bonds riskier than government bonds?
Usually, yes. A company can default. That is why corporate bonds tend to offer higher yields.
How can an individual buy government bonds in Pakistan?
Usually through a bank or an SECP-licensed broker. Ask them about current access, minimum amounts and fees.