Bond
A fixed-income investment where you lend money to a government or company in exchange for regular interest payments and the return of your money at a set date.
Think of a bond as an IOU. When you buy one, you're lending money to a government or company for a set period. In return, they pay you regular interest (called the coupon) and give your principal back when the bond matures.
Bonds come in several flavors: US Treasury bonds (backed by the federal government—considered the safest), corporate bonds (issued by companies, higher yield but more risk), municipal bonds (from state and local governments, often tax-exempt), and international bonds.
Here's the key relationship to understand: bond prices move in the opposite direction of interest rates. When rates rise, existing bond prices fall—and vice versa. A bond paying 3% becomes less attractive when new bonds pay 5%, so its market price drops to compensate.
Bond "duration" measures how sensitive a bond is to rate changes. Longer-duration bonds swing more—a 20-year Treasury drops much harder in a rate hike than a 2-year Treasury. This is why bond funds can lose money even though bonds are "safe." The individual bonds are safe if you hold them to maturity, but the fund's market value fluctuates day to day.
In your portfolio, bonds provide stability, income, and a counterweight to stocks. That counterweight role—bonds rising when stocks fall—has been generally reliable, though 2022 was a notable exception when both stocks and bonds declined as rates rose sharply.
Frequently Asked Questions
▸Are bonds safe investments?
US Treasury bonds are among the safest investments in the world—the US government has never defaulted. Corporate bonds carry credit risk (the company could default). Bond funds carry interest rate risk (prices fluctuate). If you hold an individual bond to maturity, you get your face value back regardless of what happened in between.
▸Why would I buy bonds when stocks have higher returns?
Bonds smooth out the ride. A portfolio with some bonds drops less during a stock market crash, which helps you avoid panic selling at the worst time. They also provide predictable income. The right stock/bond mix depends on your risk tolerance and how soon you'll need the money.
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