What Are Bonds & How Do They Work?

Overview

Bonds are fixed-income securities where you lend money to a government or corporation in exchange for regular interest payments and return of principal at maturity. Understanding bond mechanics is the first step toward building a diversified portfolio that balances risk and income across the bond market. Explore how bonds compare to stocks and other asset classes, or dive into key terms in our glossary.

Key Takeaways

• A bond's face value (par) is typically $1,000 — this is what you get back at maturity.
• Coupon rate is the annual interest rate paid on the face value.
• Bond prices and yields move inversely — when rates rise, bond prices fall.
• Bonds are generally safer than stocks but offer lower long-term returns.

Practical Tips

• Buy individual bonds through your broker or bond ETFs for easy diversification.
• Understand the difference between yield to maturity (YTM) and current yield.
• Government bonds (Treasuries) are the safest; corporate high-yield bonds carry more risk/reward.