Video Lesson
Prefer watching? This video covers the key concepts from this article.
What Is a Bond?
A bond is a loan you make to a government or corporation. In return, they pay you regular interest (the coupon) and return your principal at maturity. Bonds are generally safer than stocks but offer lower returns over the long run.
Key Bond Terms
- Face value (par): The amount repaid at maturity — usually $1,000
- Coupon rate: Annual interest as a percentage of face value
- Maturity date: When the principal is repaid
- Yield to maturity: Your annualized return if you hold to maturity
The Inverse Relationship: Prices and Rates
When interest rates rise, existing bond prices fall — and vice versa. If you buy a bond paying 5% and rates rise to 7%, your bond is worth less because new bonds offer better yields. Duration measures this sensitivity; longer-maturity bonds swing more with rate changes.
Types of Bonds
- US Treasuries: Safest, backed by the US government
- Municipal bonds: Tax-free interest, good for high earners
- Corporate bonds: Higher yield with credit risk
- Bond ETFs: Diversified, low-cost access to all types
When to Include Bonds
Young investors focused on growth can hold minimal bonds. As you approach retirement, shift toward bonds for stability and predictable income. During stock market crashes, bonds often rise in value — giving you assets to sell and reinvest into cheaper stocks during the recovery.