A Bond Makes the Investor the Lender

Fifty dollars lands in your account, right on schedule, exactly like it did six months ago. That's a bond doing what bonds do: you lent the money, and the borrower's paying rent on it.

A bond is a loan you make to a government, city, or company. The issuer promises regular interest payments — coupons — and the return of the face value when the bond matures.

The moving parts

• Face value (par) — the amount repaid at maturity, commonly $1,000.
• Coupon — the fixed interest, quoted as a percentage of face value.
• Maturity — the date the loan comes due.
• Yield — what you actually earn at the price you paid.

The math on a $1,000 bond

Say a $1,000 bond carries a 5% coupon. It pays $50 a year — usually $25 every six months — and returns the $1,000 at maturity if the issuer holds up its end.

Buy that same bond secondhand for $950 and your yield beats 5%, because the fixed $50 now sits on a smaller outlay. Price and yield always move in opposite directions.

Why prices move

If new bonds of similar quality start paying 7%, nobody pays full price for your 5% coupon. Your bond's market price falls until its yield matches what buyers can get elsewhere.

When rates fall, the reverse happens: older, higher-coupon bonds trade at a premium. None of it matters if you hold to maturity and the issuer pays — the swings only bite when you sell early.

The risk that isn't about rates

A bond is a promise, and promises depend on the borrower. Treasuries sit at the safe end of the spectrum; low-rated corporate "junk" bonds pay more precisely because default is a live possibility.

Rating agencies grade issuers from AAA on down, but ratings are opinions, not guarantees. A higher coupon almost always means somebody sees higher risk.

Bonds next to stocks

A bondholder is a lender with a contract; a stockholder is an owner with hopes. If the company thrives, the bondholder still gets only the promised payments — and if it fails, bondholders stand ahead of stockholders in line.

That trade-off runs through the whole market: bonds cap the upside in exchange for a steadier claim. The full comparison lives in stocks vs. bonds.

For the regulator's plain-English take, the SEC's introduction to investing covers bonds alongside the rest.

Before you buy any bond, read the coupon, the maturity, and the rating — in that order.