When a company or government wants to raise cash, it tests the waters by floating a bond . That is, it offers the public an opportunity to invest for a fixed period of time at a specific rate of interest. If investors think the rate justifies the risk and buy the bond, the issue floats. The life, or term , of any bond is fixed at the time of issue. Generally speaking, the longer the term, the higher the interest rate that's offered to make up for the additional risk of tying up your money for so long a time.
Conservative investors use bonds to provide a steady income.
They buy a bond when it's issued and hold it, expecting to receive regular, fixed-interest payments until the bond matures. Then they get the principal back to reinvest. More aggressive investors trade bonds, or buy and sell as they might with stocks, hoping to make money by selling a bond for more than they paid for it. Bonds that are issued when interest rates are high become increasingly valuable when interest rates fall. In this way, an increase in the price of a bond, or its capital appreciation , often produces more profits for bond sellers than holding the bonds to maturity.