Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
What You Need to Know
A bond is essentially an IOU. When you buy a bond, you're lending money to the issuer (government, city, or corporation) who promises to pay you back with interest.
How Bonds Work:
- You buy a $10,000 bond with a 5% coupon rate
- The issuer pays you $500/year in interest (usually semi-annual payments)
- At maturity (e.g., 10 years), you get your $10,000 back
Types of Bonds:
- Treasury Bonds: U.S. government (safest, lowest yield)
- Municipal Bonds: State/local government (tax-free interest)
- Corporate Bonds: Companies (higher yield, more risk)
- I Bonds/TIPS: Inflation-protected bonds
Bond Prices vs. Interest Rates: Bond prices move inversely to interest rates. When rates rise, existing bond prices fall (and vice versa). If you buy a 5% bond and rates jump to 6%, your bond is worth less because new bonds pay more.
Yield to Maturity (YTM): The total return you'll earn if you hold the bond until maturity, including price appreciation/depreciation and interest payments.
Why Buy Bonds?
- Stability and predictable income
- Diversification from stocks
- Lower volatility
- Portfolio ballast during stock market crashes
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds
- sec.gov
https://www.sec.gov/reportspubs/investor-publications/investorpubsinwisebondhtm.html
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest รท current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.
Correlation
A value between -1 and +1 that shows how two investments move togetherโlower correlation improves diversification.