Bonds Explained

A bond is a loan. When you buy a bond, you're lending money to a company or government. In return, they pay you interest (the coupon) and promise to repay the principal at maturity.

Bonds are generally less volatile than stocks but offer lower long-term returns. They're useful for income and for balancing risk in a portfolio. When stocks drop, bonds often hold steady or rise—helping you sleep better at night.

Types of U.S. Bonds

• U.S. Treasuries — Backed by the federal government. Very low default risk. Include T-bills (short-term), notes (2–10 years), and bonds (long-term).
• TIPS — Treasury Inflation-Protected Securities. Principal adjusts with inflation. Useful when you're worried about rising prices.
• Municipal bonds — Issued by states and cities. Interest may be tax-free at the federal level (and sometimes state level if you live in the issuing state). Good for higher-tax-bracket investors.
• Corporate bonds — Issued by companies. Higher yield than Treasuries, but higher default risk.

Key Terms You'll See

• Coupon — The interest payment you receive periodically.
• Par value (face value) — Usually $1,000. What the issuer promises to repay at maturity.
• Maturity — When the bond is repaid. Short-term (1–3 years), intermediate (4–10 years), long-term (10+ years).
• Yield — The return you earn, often expressed as a percentage. When bond prices fall, yields rise.

How Bond Prices and Rates Work

Bond prices move inversely to interest rates. When the Fed raises rates, newly issued bonds pay higher interest—so older bonds with lower coupons become less attractive. Their prices drop. When rates fall, older bonds with higher coupons become more valuable.

Buying Bonds: Individual vs Funds

You can buy individual bonds or bond funds (ETFs like BND, mutual funds). Individual bonds give you certainty: you know exactly when you'll get your money back. Bond funds don't mature—they trade like stocks. For simplicity, many investors use a single bond ETF (e.g., BND) for their bond allocation.

Bonds in Your Portfolio

Bonds add stability. A common rule of thumb: subtract your age from 100 (or 110) to get your stock allocation; the rest goes to bonds. A 30-year-old might hold 70% stocks, 30% bonds. A 60-year-old might hold 40% stocks, 60% bonds. Adjust based on your risk tolerance and timeline.