Bonds are the unsexy half of investing. They will rarely double your money, but they keep portfolios calm during the years that crush 100%-stock investors.
What a Bond Is
A bond is a loan. You give the issuer (US Treasury, a state, a company) cash for a fixed term in exchange for periodic interest payments and the return of principal at maturity. Use our Bond Yield Calculator to compute current yield and YTM for any bond.
The Big Categories
- Treasuries: Issued by the US government. The safest dollar instruments in the world.
- Municipals: Issued by states and cities. Interest is typically federal-tax-free and sometimes state-tax-free.
- Corporate (Investment Grade): Issued by financially sound companies. Higher yield than Treasuries.
- High-Yield (Junk): Issued by riskier companies. Higher yield, equity-like behavior in downturns.
- TIPS: Treasury Inflation-Protected Securities. Principal adjusts with CPI, so the real yield is the headline yield.
Duration vs Coupon
Two things drive bond price moves: duration (how long until you get your money back) and yield. Longer duration means more price sensitivity to interest-rate changes. In 2022's rate hikes, long-duration bonds fell 25% — much like a stock crash.
How Much to Own
A simple rule of thumb is the 110-minus-age stock split, with the remainder in bonds. Within bonds, most investors do well with a total bond market fund holding a mix of Treasuries and high-grade corporates.
Bottom Line
Own bonds for stability, not return. Choose duration that matches your time horizon. Avoid chasing high yield — when something pays 10% with the word "safe" next to it, it isn't safe.
Frequently Asked Questions
What is a bond, in simple terms?
A bond is essentially a loan — you give an issuer, such as the U.S. Treasury, a state government, or a company, cash for a fixed period in exchange for regular interest payments and the return of your principal at maturity. Bonds are generally considered less volatile than stocks, which is why they're often used to add stability to a portfolio. Their return potential is typically more modest than stocks over long periods, though returns and risk vary by bond type.
What's the difference between Treasury, municipal, and corporate bonds?
Treasuries are issued by the U.S. federal government and are considered among the safest dollar-denominated investments; municipal bonds are issued by states and cities and often have tax-advantaged interest; and corporate bonds are issued by companies, generally offering higher yields than Treasuries to compensate for greater credit risk. High-yield ("junk") corporate bonds carry even more risk and can behave somewhat like stocks during downturns. Choosing among them typically depends on an investor's tax situation, risk tolerance, and need for income.
Why did long-duration bonds lose value when interest rates rose sharply?
Bond prices generally move inversely to interest rates, and bonds with longer duration (time until you get your money back) are more sensitive to those rate changes. During the rate increases of 2022, for instance, long-duration bonds fell by a magnitude comparable to a stock market decline, which surprised many investors who assumed bonds were always "safe" in the short term. Matching bond duration to your time horizon is one way investors try to manage this interest-rate risk.
Run the numbers yourself
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