What Is a Bond? How Fixed Income Investments Work
Understand how bonds work, why they're considered safer than stocks, and how to use fixed income investments to balance your portfolio.
Bond
is a loan you make to a government or corporation. In exchange, they promise to pay you interest (coupon) regularly and return your principal at maturity.
Bonds are called 'fixed income' because they pay a fixed interest rate. They're generally less risky than stocks but offer lower returns.
A bond = you loan money to a company or government. They pay you interest regularly and return your principal at maturity. Bonds are safer than stocks but offer lower returns. Bond prices fall when interest rates rise.
A bond is a loan to a government or company that pays periodic interest and returns principal at maturity; its price moves inversely to interest rates.
What Is a Bond?
A bond is essentially an IOU. When you buy a bond, you're lending money to the issuer—whether that's the US government, a corporation, or a municipality. In return, they pay you interest and return your principal at maturity.
Key Bond Terms
- Face Value: Amount you receive at maturity (usually $1,000)
- Coupon Rate: Annual interest rate
- Maturity Date: When principal is returned
- Yield: Your actual return based on price paid
Types of Bonds
- Treasury Bonds: US government debt, safest investment
- Corporate Bonds: Company debt, higher yields
- Municipal Bonds: State/city debt, often tax-free
Key Takeaways
- Bonds are loans you make in exchange for interest
- Generally safer than stocks with lower returns
- Bond prices fall when interest rates rise
- Use bonds for income and portfolio stability
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