Bond
Fixed IncomeDefinition
A bond is a loan you make to a government, corporation, or municipality. In return, the borrower pays you regular interest (called the coupon) and returns your principal at maturity. Bonds are the bedrock of the financial system - the global bond market ($130+ trillion) is actually larger than the stock market.
The most critical concept in bonds: prices move INVERSELY to interest rates. When rates rise, existing bond prices fall (because new bonds offer better yields). When rates fall, existing bond prices rise. This inverse relationship is measured by duration.
Types of bonds: Treasury bonds (safest, backed by US government), corporate bonds (higher yield, credit risk), municipal bonds (tax-exempt, issued by cities/states), high-yield/junk bonds (risky companies, highest yield).
Bonds serve two roles in a portfolio: income (regular coupon payments) and ballast (they often rise when stocks fall, though 2022 was a rare exception where both fell together).
The most critical concept in bonds: prices move INVERSELY to interest rates. When rates rise, existing bond prices fall (because new bonds offer better yields). When rates fall, existing bond prices rise. This inverse relationship is measured by duration.
Types of bonds: Treasury bonds (safest, backed by US government), corporate bonds (higher yield, credit risk), municipal bonds (tax-exempt, issued by cities/states), high-yield/junk bonds (risky companies, highest yield).
Bonds serve two roles in a portfolio: income (regular coupon payments) and ballast (they often rise when stocks fall, though 2022 was a rare exception where both fell together).
Formula
Bond price moves inversely to yields
Example
You buy a 10-year Treasury bond with a 4% coupon at par ($1,000). You receive $40/year in interest for 10 years, plus your $1,000 back at maturity. If rates rise to 5% the next day, your bond's market price drops to ~$920 - because nobody would pay $1,000 for a 4% bond when they can get 5% elsewhere.