What Is a Bond

The plain answer

A bond is a loan. You (or a fund you own) lend money to a government or company. In return you are promised interest and, usually, your principal back on a set date.

Bonds can be steadier than stocks. They are not risk-free. The borrower can fail to pay, and the bond’s market price can fall if interest rates rise.

How it actually works

The face value is the amount due at maturity, which is the repayment date. The coupon is the interest schedule. Credit risk is the chance the borrower does not pay as agreed.

If you sell before maturity, you get the market price, which moves as rates and credit views change. When new bonds pay higher interest, older lower-coupon bonds are usually worth less to a buyer.

A bond fund does not “mature” the way one bond does. The fund keeps buying and selling, so its price can keep moving.

What this means for you

Bonds can dampen a stock-heavy portfolio and hold money you need later than cash but sooner than a decades-long stock plan. They usually earn less than stocks over long periods, which is the price of that relative stability.

Match the bond’s risk to the job. Emergency cash still belongs in a deposit account, not in a long-term bond fund. See Where to Keep Your Emergency Fund.

Common mistakes

Assuming a government bond cannot lose market value before maturity.

Using a long-term bond fund as if it were a savings account.

Chasing a high yield without asking who is paying it and why.

Related pages

• What Is a Stock
• Risk and Return
• Saving vs. Investing