Learn section
Bonds
A bond is a loan. You lend money to a government, city, or company. In return, the issuer usually pays interest and promises to repay the principal on a maturity date.
Jump to quizWhat it is
Bonds are debt securities. The buyer becomes a lender, not an owner. The bond contract defines the coupon, maturity, and repayment priority.
How it can make money
Returns usually come from coupon payments, repayment at maturity, and price changes if rates move after you buy.
What can go wrong
Bond prices can fall when interest rates rise. Issuers can also default, and inflation can reduce the real value of fixed payments.
Common beginner trap
A high yield is not automatically a bargain. It can mean the market sees higher credit or duration risk.
Where it fits
Bonds may fit money you want to stabilize, income needs, or goals with a clearer date than long-term stock growth.
Main risks
- Interest-rate risk: existing bond prices often fall when new bonds offer higher yields.
- Credit risk: the issuer may struggle to pay interest or repay principal.
- Inflation risk: fixed payments can buy less in the future.
Beginner mistakes
- Choosing only the highest yield without asking why the yield is high.
- Ignoring duration and being surprised when a bond fund falls after rates rise.
- Treating bonds like cash even though market prices can move.
When it may fit
- You want more predictable interest income.
- You want part of the portfolio to move differently from stocks.
- You are matching money to a future date, like tuition or a home deposit.
Key terms
- Coupon
- The stated interest payment a bond pays, usually shown as an annual percentage of face value.
- Yield
- The return implied by the bond price, coupon, and time to maturity.
- Maturity
- The date when the issuer is expected to repay the bond principal.
- Duration
- A measure of how sensitive a bond or bond fund is to interest-rate changes.
Related Lucrum tools
Neutral resources
Knowledge check
Lesson quiz
Not completed yet
Question 1 of 6
If you buy a bond, what role do you take?
Useful links
Loading useful links...