What a bond is
A bond is a loan you make to a government or company. In return they pay you regular interest, called the coupon, and give back your original amount, the principal, on a set date.
Why prices move
When market interest rates rise, existing bonds that pay less become less attractive and their prices fall. When rates fall, existing bonds look better and prices rise. This is why bond funds can lose value in a rising-rate period even though they are considered calm.
Types
- Government bonds. Among the safest, issued by national governments.
- Corporate bonds. Pay more because companies carry more risk.
- High-yield bonds. Higher income, higher chance of default.
Role in a portfolio
Bonds add stability and income, and often cushion a portfolio when stocks fall. They are the anchor for investors who want to protect capital.
Key takeaways
- Bonds pay regular interest and return principal.
- Bond prices fall when interest rates rise.
- They add stability to a mixed portfolio.
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This lesson is general education and not personal financial, tax or legal advice. Investing involves risk, including loss of principal.