Bond
A bond is a fixed income security that represents a loan made by an investor to a borrower — typically a corporation or government — in exchange for periodic interest payments and the return of the principal at maturity.
When you buy a bond, you are effectively lending money to the issuer. The issuer promises to pay you a fixed rate of interest — called the coupon — at regular intervals, and to repay the face value of the bond when it matures. Bonds are the backbone of the global fixed income market, and the U.S. bond market alone is the largest in the world, encompassing Treasury securities, agency debt, municipal bonds, and corporate bonds totaling well over $50 trillion.
The U.S. Treasury market is the benchmark against which virtually all other bonds are priced. When investors say a corporate bond yields '200 basis points over Treasuries,' they mean its yield is 2 percentage points higher than the comparable Treasury bond, reflecting the additional credit risk. The Federal Reserve closely monitors Treasury yields because they influence borrowing costs throughout the entire economy, from mortgage rates to corporate capital expenditures.
Bonds are generally considered less risky than stocks because bondholders are creditors — in the event of bankruptcy, they have a legal claim on the issuer's assets before equity shareholders. This seniority in the capital structure is why bonds typically offer lower expected returns than stocks over long time horizons, but with considerably less volatility. Investment-grade bonds historically return roughly 4–6% annually, compared to equities at 8–10%.
Bond prices move inversely to interest rates. When the Federal Reserve raises the federal funds rate, newly issued bonds carry higher coupons, making existing lower-coupon bonds less attractive and pushing their prices down. Conversely, when rates fall, existing bonds with higher coupons become more valuable. This inverse relationship is one of the most important concepts in fixed income investing.
The U.S. bond market includes several major segments: U.S. Treasuries (backed by the full faith and credit of the federal government), agency bonds (issued by entities like Fannie Mae and Freddie Mac), municipal bonds (issued by state and local governments), and corporate bonds (issued by public and private companies). Each segment carries different risk and return profiles, tax treatment, and liquidity characteristics that make them suitable for different investor needs.