Bond.

In plain English

When you buy a bond, you're lending money. The borrower (a government or corporation) agrees to pay you interest at a set rate for a set number of years, then return the original amount on a specific date. U.S. Treasury bonds, municipal bonds, and corporate bonds are the three main flavors, each with different rules and risk levels.

01Why it matters

Bonds are usually less volatile than stocks. They're how most retirement portfolios reduce risk as the owner gets closer to needing the money. A 25-year-old might own mostly stocks; a 65-year-old usually owns more bonds. Bond returns are typically lower than stock returns over long periods, but the steadier monthly income matters when you're actually withdrawing from the account.

02The math, step by step

A 10-year U.S. Treasury bond paying 4% on a $10,000 purchase pays $400 per year in interest for 10 years (so $4,000 total), and at year 10 you get your $10,000 back. If interest rates rise during those years, you can sell the bond early, but probably for less than $10,000, since newer bonds offer better rates. If you hold to maturity, you get exactly what was promised.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT