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.
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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