What is a bond?
In one line: A bond is a loan you make to a government or company. They pay you interest over time and repay the full amount on a set date.
A simple example
When you buy a bond, you're the lender. A company or government borrows your money and promises two things: regular interest, and your money back at the end.
Say you buy a 10-year bond with a $1,000 face value and a 4% Coupon.
- Each year you get 4% of $1,000 = $40 in interest, often paid as $20 twice a year.
- After 10 years you get your $1,000 back.
That's if the borrower pays. Some don't. That risk is called default risk.
Why prices move
Bonds trade after they're issued, and their prices change.
Say new bonds now pay 5%. Nobody wants your 4% bond at full price anymore. Its price drops until its return matches the new rate. When rates fall, the opposite happens: older, higher-paying bonds become worth more.
So when interest rates rise, bond prices fall. How much they fall depends on Duration. The return you'd get at today's price is the Bond yield.
Why it matters for traders
Bonds and their yields move every other market. Higher yields can pull money away from stocks and lift the US dollar. Our guide on how interest rates affect stocks explains the chain.
A common mistake
Thinking bonds can't lose value. A bond held to the end, from a borrower that pays, returns its face value. But if you sell early after rates rise, you can get less than you paid. Long-term bonds can drop a lot.
Government bonds from the US Treasury are seen as very low default risk. Company bonds pay more because their risk is higher. Compare the two with Credit spread (bonds).
Questions
Are bonds safer than stocks?
Usually they swing less, but they're not risk-free. Prices fall when rates rise, and some borrowers fail to pay.
What's the difference between a bond and a stock?
A stock is a piece of ownership in a company. A bond is a loan to it. Our stocks vs bonds page compares them.
What is a bond's face value?
It's the amount repaid at the end, often $1,000 per bond. Interest is figured from it.
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