Glossary
Bond
A loan from an investor to a government or company that pays interest on a schedule and returns the principal at maturity.
On this page
A bond is a debt security: when you buy one, you lend money to the issuer, which might be the US Treasury, a city or a corporation, in exchange for regular interest payments and the return of the loan amount on a set date. Bonds are the largest part of the world's securities markets and the main counterweight to stocks in most diversified portfolios, because high-quality bonds have usually been far less volatile.
How a bond works
Each bond has a few defining terms:
- Face value (par): the amount repaid at maturity, commonly $1,000 per bond.
- Coupon: the annual interest rate on the face value, usually paid in two installments.
- Maturity: the date the principal is repaid, from a few months to 30 years or more.
- Issuer credit quality: how likely the borrower is to pay on time, summarized by credit ratings.
The main risks
- Interest-rate risk. Bond prices move opposite to yields, and longer maturities move more. In 2022 broad US bond indexes lost more than 10%, an unusually bad year, as rates rose quickly.
- Credit risk. The issuer may miss payments. Lower-rated, high-yield bonds pay more to compensate.
- Inflation risk. Fixed payments buy less if prices rise; Treasury Inflation-Protected Securities adjust for this.
Holding a bond to maturity returns its face value if the issuer does not default, regardless of price swings along the way. Bond funds have no maturity date, so their value keeps moving with rates.