Bond

Definition

A bond is a way to lend money to a borrower (a company, government, or agency) and get paid interest in return. When you buy a bond, you're essentially providing a loan. The issuer promises to pay you interest at a fixed rate (the coupon) and return your original principal at a set date (maturity). Bonds are less risky than stocks but also offer lower returns on average.

Why it matters

Bonds provide a steady income stream and help protect your portfolio when stocks stumble. During the 2020 market crash, bonds actually went up slightly while stocks crashed, offsetting losses for balanced portfolios. They're not exciting, but that's the point. Bonds reduce portfolio swings and let you sleep better, especially as you get older. A $10,000 bond paying 4% yields $400 per year regardless of what the market does.

Quick example

You buy a 10-year Treasury bond for $10,000 paying 3% interest. Each year, you receive $300 in interest. In 10 years, you get your $10,000 back. The U.S. government's excellent credit makes this very safe. A corporate bond from a solid company might pay 5% ($500 per year) to compensate for slightly more risk.

The bottom line

Knowing what Bond means helps you make better day-to-day money decisions. It makes rates, account options, and tradeoffs easier to compare.