What Is a Bond?

A bond is a loan. You're the lender.

A government or a company needs money. Instead of going to a bank, they borrow it from investors. You hand over a sum, they pay you interest on a fixed schedule, and on an agreed date they give your money back.

That's it. Everything else — coupons, yields, par, maturity — is vocabulary for the parts of that arrangement. We'll take them one at a time, with the same example throughout.

What you actually own

This is the part worth getting straight, because it's the opposite of a stock.

Buy a share and you own a piece of the company. If it does brilliantly, your piece is worth more. There's no ceiling and no promise.

Buy a bond and you own nothing. You own a promise — a contract saying they'll pay you a set amount on set dates. If the company triples in size, you still get exactly what the contract said. That sounds like the worse deal, and sometimes it is. What you're buying instead is knowing the number.

Here's the whole life of one. A $1,000 bond paying 5% for 5 years — round numbers, chosen so you can check every figure in your head.

Add it up: $250 of interest plus your $1,000 back is $1,250. And you knew that on day one.

That shape — a drip, then a cliff — is what a bond is. Every bond in the world is a variation on it. 5% is close to what the market's actually paying right now, too: the US 10-year Treasury was at 4.66% on 25 August 2026. That number will have moved by the time you read this, which is a hint about where the article is going.

The four things that define any bond

Every bond, from a US Treasury to a corporate one, is described by the same four facts. Learn these and you can read any bond's listing.

• The face value — what they repay at the end. Almost always $1,000, no matter what the bond costs to buy. You'll also see it called par, or the principal. Same thing.
• The coupon — the interest rate, quoted as a percentage of the face value. 5% means $50 a year on a $1,000 bond, usually split into two payments of $25. The name is literal: bonds used to be paper with tear-off stubs you posted in to get paid.
• The maturity — the date they repay you. A bond maturing in 2031 stops existing in 2031. This is the biggest single difference between a bond and a share, which has no end date at all.
• The issuer — who's borrowing. A government, a city, a company. This is the one that decides how likely you are to actually get paid, and it's the reason two bonds paying the same coupon can be wildly different deals.

Change any one of those four and you have a different bond. Have a go — the numbers move the moment you do.

Push the term out to thirty years and watch the interest column. That's the trade you're making: your money is theirs for a long time, and they pay you for the wait.

Why this exists at all

Governments spend more than they collect in tax. Companies build factories before those factories earn anything. Both need money now and can pay it back later, and both are too big to borrow it from one bank.

So they split the loan into thousands of pieces and sell them to investors. You're one of the investors. That's the whole mechanism, and it's older than the stock market.

It's also much bigger than most people assume. US Treasuries alone had $31.5 trillion outstanding as of July 2026. Add corporate bonds at $11.7 trillion and municipal bonds at $4.5 trillion, both as of the first quarter of 2026, and the whole US bond market comes to roughly $58.0 trillion — larger than the US stock market.

If you've only ever heard about stocks, that's the surprise. The bond market is the bigger one. It's just quieter, because nobody makes a video about a government paying its interest on time.

Why the price moves when the deal is fixed

Here's the part that confuses everyone, and it's the reason bonds have a reputation for being complicated when they aren't.

You don't have to hold a bond until it matures. You can sell it to someone else, and there's a market where that happens all day. So a bond has a price, and that price moves — even though the payments never change.

Say you own the 5% bond and interest rates rise. New bonds are now being issued paying 6%. Why would anybody buy yours at $1,000 when they could get more elsewhere?

They wouldn't. So the price of yours drops until it's competitive again.

At 6%, your bond is worth about $957.35. Buy it at that price and the $50 a year works out to 5.22% on what you paid — which is roughly what the new bonds are offering. That's the price finding its level.

It works the other way too. If rates fall to 4%, your 5% bond is suddenly generous, and buyers will pay about $1,044.91 for it.

Notice the middle column. A bond paying exactly what the market's asking for is worth exactly its face value. That's what “par” means, and it's why $1,000 keeps showing up: it's the hinge the price swings around.

It's also why you'll see the word yield everywhere instead of just the coupon rate. The coupon is fixed to the face value. The yield is what you actually earn based on what you paid. Once the price moves, those two stop agreeing, and the yield is the honest one.

Rates rose. Is that actually your problem?

Usually not, and this is the most reassuring thing about owning a bond directly.

That $957.35 is what somebody would pay you today. It isn't what the bond pays. The contract still says $25 every six months and $1,000 at the end, and the borrower doesn't care what the price did in between.

So a falling bond price only costs you if you sell. If you bought a five-year bond because you need the money in five years, a bad year for bond prices in between is something you read about rather than something that happens to you.

This is exactly where individual bonds and bond funds part company. A fund never matures — it's always holding a rolling mix, so there's no date at which you're made whole. That's not a flaw, it just means the reassurance above doesn't transfer. If you own bonds through a fund, and most people do, the price is the thing.

What can go wrong

Four things, in roughly the order they should worry you.

1. 1They don't pay. This is the real risk and the one the other three are noise next to. A company that goes bust may pay you back some of it, or none. Ratings agencies grade issuers on exactly this, and the grade is why one bond pays 4% and another pays 11% — the second one is being paid to take a risk, not being generous. Which grade is which is a whole article of its own.
2. 2Inflation eats it. You've locked in a fixed number of dollars. If prices rise faster than you expected, those dollars buy less than you planned for. This is the quiet one, and it's why very long bonds at low rates have hurt people badly in the past.
3. 3Rates rise and you need to sell. Covered above. The $42.65 only becomes real if you don't hold on.
4. 4You can't find a buyer at a fair price. Government bonds trade constantly and this never comes up. A small company's bond can be genuinely hard to sell without taking a worse price than the screen suggests.

Notice what isn't on that list: the company having a bad quarter, the share price falling, the CEO leaving. None of that touches you as long as they keep paying. You're a lender, not an owner, and lenders get paid before owners get anything.

How you actually buy one

First, the thing that puts people off: you don't need $1,000. That's how bonds are denominated, not what they cost to start.

In the US, TreasuryDirect sells government bonds straight from the government in increments of $100. No broker, no middleman, no fee. Most other countries have some version of this, and your national debt agency's website is the place to look.

Through a broker you can buy government and corporate bonds on the secondary market — the same place the prices above come from. The mechanics look like buying a share: search, choose an amount, place the order.

And most people who own bonds don't buy them one at a time at all. They own a bond fund or a bond ETF, which holds hundreds and handles the reinvesting. That's one decision instead of a hundred, and it's how bonds usually turn up in a portfolio.

One thing to check before you buy anything: how the interest is taxed where you live. Some countries treat bond interest differently from dividends, and some government bonds get a break that corporate ones don't. It varies enough that a general answer would be useless — look up yours.

Frequently asked questions