Understanding Bonds Basics

Bonds are loans you make to a government, municipality, or corporation. In exchange, the issuer promises to pay you interest on a schedule and return your principal when the bond matures.

How bonds work

• Face value (par): the amount repaid at maturity, typically $1,000 per bond.
• Coupon: the interest rate the issuer pays, usually fixed at issuance.
• Maturity: when the principal is returned — from a few months to 30+ years.
• Yield: your effective return, which moves with the price you pay for the bond.

Price and interest rates move in opposite directions

When market interest rates rise, existing bonds with lower coupons become less attractive, so their prices fall. When rates fall, existing bonds gain value. Longer-maturity bonds are more sensitive to these swings — a concept called duration.

Common types

• U.S. Treasuries: backed by the federal government; the benchmark for low credit risk.
• Municipal bonds: issued by states and localities; interest is often exempt from federal tax.
• Corporate bonds: higher yields than Treasuries to compensate for credit risk.
• Bond funds and ETFs: diversified baskets of bonds with no fixed maturity date.

Why investors hold bonds

Bonds typically dampen portfolio volatility, generate predictable income, and historically have often (though not always) risen when stocks fall. The trade-off is lower expected long-term returns than equities.

Key takeaways

• A bond is a loan with a schedule: coupons along the way, principal at maturity.
• Rising rates push bond prices down; falling rates push them up.
• Credit quality and maturity are the two big risk dials.

This article is for educational purposes only and is not investment advice. Consult your advisor about your specific situation.