Bonds — Lending Your Money for Interest

A bond is a loan you make to a government or corporation. They pay you interest (coupon), then return your principal at maturity.

Key terms:

Face value (par) — amount borrowed (typically $1,000)

Coupon rate — annual interest rate paid on face value

Maturity — when the bond expires and principal is returned

Yield — actual return based on current market price

Price/yield relationship:

When interest rates rise → bond prices fall

When interest rates fall → bond prices rise

This is inverse and critical to understand

Types of bonds:

Treasury bonds (T-bonds) — US government; safest; backed by full faith and credit of US

I-bonds — inflation-protected savings bonds; popular when inflation is high

Municipal bonds (munis) — state/local governments; often tax-exempt

Corporate bonds — higher yield, higher risk; rated by Moody's, S&P

Junk bonds (high yield) — below investment grade; high risk, high potential return

Role in portfolio: Bonds reduce volatility. Classic allocation: 60% stocks / 40% bonds (60/40 portfolio).

Reference:

Wikipedia: Bond

https://en.wikipedia.org/wiki/Bond_(finance)