Bond
Also called: debt security, fixed-income investment
A bond is a loan you make to a government, agency, or company. In return, the issuer usually promises to pay interest, called the coupon, on a set schedule and to repay the bond’s face value on a specific date, called its maturity.
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How it works
The face value, also called par value, is the amount the issuer repays at maturity, and the coupon rate is a percentage of that amount. Many bonds pay their coupon in two installments a year. The U.S. government, federal agencies, cities, and corporations all issue bonds, and a bond may come due in a few months or many years.
After a bond is issued, its market price moves in the opposite direction from interest rates. If new bonds start paying more, an older bond with a lower coupon becomes less attractive and its price falls; if rates drop, its price tends to rise. Bonds with longer maturities are generally more sensitive to these moves. If you hold to maturity and the issuer pays as promised, you receive the face value whatever the price did along the way.
Rate changes aren’t the only risk. Credit risk is the chance the issuer fails to make interest or principal payments. Inflation can erode what fixed payments are worth, some bonds can be redeemed early by the issuer when rates fall, and a bond can be hard to sell quickly. A bond fund, which holds many bonds and is managed toward an objective, behaves differently from a single bond you own outright.
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Sources and further reading
Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.