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 ÷ 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 together—lower correlation improves diversification.