What is a bond?
Last updated August 2026
Short answer
Stocks make you an owner; bonds make you a lender. The difference explains almost everything else about how the two behave.
The terms that define one
Face value is what gets repaid at the end, commonly $1,000 per bond. The coupon is the interest rate paid on that face value, usually twice a year.
Maturity is the date the principal comes back. A two-year note and a thirty-year bond behave very differently even at the same coupon.
The issuer determines credit risk. A Treasury is backed by the US government; a corporate bond depends on the company remaining able to pay.
Why price moves against rates
Once issued, a bond's coupon is fixed. If rates on new bonds rise to 5%, nobody pays full price for one paying 3%.
The price falls until the return a new buyer earns is competitive. That adjusted return is the yield, which is what matters rather than the coupon.
Duration measures the sensitivity. A long-dated bond has more remaining payments to reprice, so the same change in rates moves its price much further than a short one.
Individual bonds versus bond funds
Hold an individual bond to maturity and interim price moves never become losses. You receive the interest and the principal, and the borrower's solvency is the only real question.
A bond fund holds many bonds and continually replaces maturing ones, so it has no maturity date of its own. A rate rise reduces its net asset value, and that decline is realised when you sell.
Funds compensate with diversification and simplicity, which matters most for corporate and municipal bonds where a single default would be painful.
Try it in Walnut
Walnut reads your connected brokerage and shows what share of your portfolio actually sits in bonds, which is frequently different from what people assume.
What bonds are for in a portfolio
Income, at a known rate. That is the original purpose and the simplest one.
Ballast. Bonds usually fall less than stocks in an equity downturn, which is what makes a mixed portfolio easier to hold through one.
Matching a date. Money needed in three years belongs in something that matures in three years rather than in an asset whose price on that date is unknowable.
The risks worth naming
Interest rate risk, which is the price effect above and hurts longer bonds most.
Credit risk, the chance the borrower cannot pay. Ratings summarise it, and higher yields exist because the market is charging for the possibility.
Inflation risk, the quiet one. A fixed 3% coupon during 6% inflation loses purchasing power every year while looking perfectly safe on the statement.
Reading a bond quote
Prices are quoted as a percentage of face value, so a bond at 98 costs $980 per $1,000 of face. Above 100 is a premium, below is a discount.
Current yield is the coupon divided by the price. Yield to maturity is the more useful figure, because it also accounts for the gain or loss as the price converges to face value at maturity.
Accrued interest is added at settlement, so the buyer pays the seller for the days since the last coupon. The quoted price excludes it, which is why the amount you pay differs from the price you agreed.
Sources
Bond basics, yields and risks are covered by the SEC at investor.gov. Treasury securities and auction terms are published at TreasuryDirect. Tax treatment of interest is in IRS Publication 550. Walnut is informational and is not an investment adviser. This guide is educational and not personalized investment advice.
FAQ
What is a bond in simple terms?
+
A loan. You lend a fixed amount to a government or company, they pay you interest at a stated rate for a stated term, and they return the principal at maturity. Unlike a share, it carries no ownership and no upside beyond the agreed interest.
Why do bond prices fall when interest rates rise?
+
Because new bonds pay the higher rate. A bond paying 3% is worth less than one paying 5%, so its market price drops until the yield a buyer earns matches what is newly available. The effect is larger the longer the remaining term.
Do I lose money if rates rise and I hold to maturity?
+
Not on the bond itself. You still receive the stated interest and the principal at maturity, so the price move in between is unrealised. A bond fund is different, because it holds a rolling portfolio and never matures, so the loss can be real.
Are Treasury bonds risk-free?
+
They carry effectively no credit risk, being backed by the US government, but they still carry interest rate risk and inflation risk. A long Treasury bought at a low yield can lose substantial market value, and fixed interest loses purchasing power when inflation runs high.
How are bonds taxed?
+
Interest is generally ordinary income. Treasury interest is exempt from state and local tax, and most municipal bond interest is exempt from federal tax. Selling a bond above your basis produces a capital gain, taxed on the usual holding-period rules.
Should I own individual bonds or a bond fund?
+
Individual bonds give a known maturity date and a known payoff if held, which suits money needed at a specific time. Funds give diversification and easy trading without a maturity date. Neither is universally better; the deciding question is whether you have a date.
What is yield to maturity?
+
The total annualised return if you hold the bond until it matures, counting both the coupon payments and the gain or loss as the price converges to face value. It is more useful than the coupon or the current yield, which each ignore part of the picture.