Bonds 101: the IOU you can buy

A bond is a loan. You give a government or a company some money. They promise to pay you a set amount of interest at regular intervals, then return your original amount on a specific date.

If you buy a 10-year U.S. Treasury bond for $1,000 paying 4%, the U.S. government will send you $40 each year for ten years and return your $1,000 at the end. That is the whole product.

The three numbers that matter

• Face value (or par): the amount you get back at the end. Usually $1,000.
• Coupon rate: the interest rate. The 4% in our example.
• Maturity: when you get your money back. Two years, ten years, thirty years.

Why bond prices move

If you buy a bond paying 4% and then new bonds start paying 6%, your old bond becomes less attractive. Its price on the resale market drops. The reverse is also true: when interest rates fall, existing bonds with higher rates get more valuable.

This is why people say 'when rates go up, bond prices go down': they are inversely related. If you hold the bond to maturity and the issuer does not default, you still get exactly what you were promised.

Types you will hear about

• Treasuries: issued by the U.S. government. Considered the safest bonds in the world.
• Municipal bonds (munis): issued by states and cities. Often tax-advantaged.
• Corporate bonds: issued by companies. Higher rates, but riskier.
• High-yield (junk) bonds: issued by companies with weaker finances. Pay more, but more likely to default.

What this lesson is NOT

This explains how a bond pays you and why its price moves. It does not say which specific bonds to buy, and it does not forecast where interest rates go next.