Bonds are an essential part of the financial landscape, providing a stable investment option for many individuals and institutions. Here's a concise guide to understanding the basics of bonds.

What is a Bond?

A bond is a debt security. When you buy a bond, you're essentially lending money to the bond issuer (which can be a government, municipality, corporation, or other entity). In return, the issuer agrees to pay you back the principal amount of the bond at maturity, typically at a fixed interest rate over the life of the bond.

Key Features of Bonds

  • Issuer: The entity borrowing money by issuing the bond.
  • Maturity: The date when the principal amount of the bond is repaid to the bondholder.
  • Coupon Rate: The annual interest rate that the issuer pays to the bondholder.
  • Market Value: The current price of the bond in the secondary market, which can fluctuate based on interest rate changes and other factors.

Types of Bonds

  • Government Bonds: Issued by national governments and are considered to be very low risk.
  • Municipal Bonds: Issued by state and local governments to fund public projects and are generally exempt from federal income tax.
  • Corporate Bonds: Issued by companies to raise capital for various purposes and carry a higher risk compared to government or municipal bonds.

How to Invest in Bonds

Investing in bonds can be done through a brokerage account or directly through a bank. You can buy individual bonds or bonds through a bond mutual fund or exchange-traded fund (ETF).

Learn more about bond investing

Risks Associated with Bonds

  • Interest Rate Risk: The value of a bond can fluctuate with changes in interest rates.
  • Credit Risk: The risk that the issuer will default on their payment obligations.
  • Liquidity Risk: The risk that you won't be able to buy or sell the bond quickly at a fair price.

Useful Resources

Bond Market