A bond is a loan you make to a government or corporation. In return, the borrower promises to pay you interest on a schedule and return your principal at a set maturity date.
Bond prices move inversely to interest rates: when rates rise, existing bonds with lower coupons become less attractive and their prices fall, and vice versa. Credit quality matters too, weaker borrowers pay higher yields to compensate for default risk.
Bonds typically bring more stability and income to a portfolio than stocks, which is why they anchor the conservative side of most balanced portfolios, especially as investors approach a goal like retirement.
Key takeaways
- A bond is a loan with promised interest and principal
- Prices fall when rates rise, and rise when rates fall
- Bonds add stability and income to a portfolio
