Bonds & Fixed Income
Plain English
A bond is essentially a loan you make to a government or company. In exchange, they promise to pay you interest on a schedule and return your original amount at the end — assuming they can.
What is it?
A bond is a debt security: the issuer (a government or corporation) borrows money from bondholders and agrees to pay periodic interest (the coupon) plus return the principal at a stated maturity date.
Why does it matter?
Bonds behave differently from stocks — generally less volatile, with a more predictable income stream — which is why they're often discussed alongside stocks as a portfolio's other major building block (see the Stocks vs. Bonds comparison).
How does it work?
Bond prices move inversely to interest rates: when prevailing rates rise, existing bonds paying a lower fixed rate become less attractive and their market price falls, and vice versa. A bond's yield reflects both its coupon and its current market price.
Risks and limitations
Bonds carry interest-rate risk (price changes as rates move), credit risk (the issuer might not pay as promised), and inflation risk (fixed payments buy less if inflation rises). "Lower risk than stocks" is relative, not "no risk."
Questions to ask a professional
What is this bond's credit rating? How does its price react if interest rates rise? Am I holding it to maturity or might I need to sell early?