Bond

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Bond is the name for a debt security in which an investor lends money to a government, municipality, or corporation in exchange for periodic interest payments and the return of the principal on a set maturity date.

How a bond works

When you buy a bond, you become a creditor of the issuer rather than an owner, which is the key difference from buying stock. Every bond has a few core terms:

  • Face (par) value: the amount repaid at maturity, often $1,000 per bond.
  • Coupon: the annual interest rate paid on face value, commonly in semiannual installments.
  • Maturity: the date the principal is due, ranging from a few months to 30 years or more.
  • Issuer: the borrower, whose creditworthiness affects the interest it must offer.

Bondholders rank ahead of shareholders if an issuer runs into trouble, which is one reason bonds are generally considered less risky than stocks from the same company.

Example: bond price and yield

Suppose you buy a hypothetical 10-year corporate bond with a $1,000 face value and a 5% coupon. It pays $50 a year, in two $25 payments. If you hold it to maturity and the issuer pays as promised, you receive $500 in interest plus your $1,000 back.

Now suppose market interest rates rise and new comparable bonds pay 6%. Your 5% bond becomes less attractive, so its market price might fall to around $930, raising its effective yield for a new buyer. If rates instead fall to 4%, its price would rise above $1,000. Bond prices and yields move in opposite directions.

Yield to maturity combines the coupon income, the purchase price, and the time remaining, giving a single annualized figure that lets investors compare bonds with different coupons and prices on an equal footing.

Types of bonds

  • US Treasury securities: backed by the US government and often used as the benchmark risk-free rate.
  • Municipal bonds: issued by states and localities; interest is often exempt from federal income tax.
  • Corporate bonds: issued by companies, ranging from investment grade to high yield (junk).
  • Other forms: agency bonds, inflation-protected bonds, zero-coupon bonds, and international bonds.

Many investors hold bonds through mutual funds or ETFs rather than buying individual issues.

Bond risks and role in a portfolio

Bonds carry risks of their own. Interest rate risk means prices fall when rates rise, more so for longer maturities. Credit risk is the chance the issuer defaults, which can lead to losses in bankruptcy. Inflation risk erodes the purchasing power of fixed payments, and liquidity risk affects some less-traded issues.

Despite these risks, high-quality bonds often hold up better than stocks during a recession and provide steady income, which is why many investors combine the two in a diversified portfolio.

Frequently asked questions

Why do bond prices fall when interest rates rise?

Existing bonds pay a fixed coupon. When new bonds offer higher rates, older bonds must trade at a lower price so their effective yield matches what buyers can get elsewhere.

Are bonds safer than stocks?

High-quality bonds have historically been less volatile than stocks, and bondholders are paid before shareholders. However, bonds can still lose value from rising rates, inflation, or issuer default.

What happens when a bond matures?

The issuer repays the face value to the bondholder, and interest payments stop. The investor can then reinvest the money elsewhere.

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For information only, not investment advice. See the disclaimer.