Bonds & Fixed Income

What a bond actually is

When you buy a bond, you're not buying ownership in anything — you're lending money to whoever issued it (a government or a company) in exchange for regular interest payments and the return of your original amount ("principal") at a set future date ("maturity").

This is fundamentally different from stock ownership: a bondholder is a creditor, not an owner. That distinction matters most when a company runs into trouble — bondholders get paid back before stockholders in almost every scenario, which is part of why bonds are generally considered lower-risk than stocks.

Bond prices vs. interest rates

Existing bonds trade in a secondary market, and their prices move inversely to interest rates. If you hold a bond paying 3% and new bonds start being issued at 5%, your older, lower-paying bond becomes less attractive — so its price falls to compensate a buyer for the lower rate. The reverse happens when rates fall.

This relationship confuses a lot of beginners: bonds are often seen as "safe," but their prices can still fluctuate meaningfully when interest rates move, especially for longer-maturity bonds.

Credit ratings explained

Credit rating agencies grade bond issuers on how likely they are to pay back what they owe. Ratings run from AAA (highest quality, lowest risk) down through a scale to "junk" or "high-yield" bonds, which pay higher interest specifically because they carry meaningfully more risk of default.

A higher-rated bond is generally safer but pays less interest; a lower-rated bond pays more but carries real risk that the issuer won't be able to pay it back — the same risk/return tradeoff that shows up throughout investing.

Government vs. corporate vs. municipal bonds

Government bonds (like U.S. Treasuries) are backed by the federal government and considered among the safest investments in the world. Corporate bonds are issued by companies and carry more risk (and typically higher yield) since companies can fail in ways governments generally don't. Municipal bonds are issued by states and cities, often with a tax advantage — interest is frequently exempt from federal (and sometimes state) taxes.

Each type serves a different role in a portfolio, and the right mix depends on your tax situation, risk tolerance, and what role you want bonds to play alongside your stock holdings.

Key terms

Bond

A loan to a company or government that pays back with interest over time.

Coupon rate

The stated interest rate a bond pays on its face value.

Maturity

The future date when a bond's principal is repaid in full.

Credit rating

A grade assigned to a bond issuer reflecting how likely they are to repay what they owe.

Principal

The original amount lent to a bond issuer, repaid at maturity.

Yield

The current return a bond offers, based on its price today rather than its original coupon rate.