Bond investing means lending money to issuers in return for interest payments and principal repayment at maturity. Major categories include corporate bonds, U.S. Treasuries, and municipal bonds. Key risks are credit/default risk, interest-rate risk, inflation risk, and liquidity risk. Investors use bonds for income, diversification, and lower volatility; common approaches include holding individual bonds, laddering, or using bond funds/ETFs.
What a bond is
A bond is a loan you make to an issuer - a company, a government, or a municipality. The issuer agrees to pay you interest (the coupon) and to return your principal (the face value) at a set date (the maturity). In return, you accept the risk that the issuer might be unable to pay.
How bonds pay you
Bonds typically pay a fixed or variable coupon at regular intervals. At maturity the issuer repays the principal. The combination of coupon payments and the return of principal determines the bond's yield.
Yield can refer to the current income you receive or the yield to maturity, which estimates the total return if you hold the bond to its maturity and the issuer makes all payments.
Main types of bonds
Corporate bonds
Companies sell corporate bonds to raise capital for expansion, acquisitions, or operations. Corporate bonds carry credit risk: if the company struggles, it could default.
U.S. Treasuries
Treasuries (bills, notes, and bonds) are issued by the U.S. Treasury. They are generally considered among the lowest credit-risk investments because they are backed by the U.S. government.
Municipal bonds
Municipal (muni) bonds fund state and local projects such as schools and roads. Many munis offer interest that is exempt from federal income tax and sometimes state or local tax, depending on residency and bond type.
Risks to consider
Credit (default) risk: The issuer may not make interest or principal payments. Credit rating agencies (for example, S&P, Moody's, Fitch) provide opinions on creditworthiness, but ratings are not guarantees.
Interest-rate risk: Bond prices fall when market interest rates rise. Long-term bonds tend to show larger price swings than short-term bonds.
Inflation risk: Rising inflation reduces the real purchasing power of fixed coupon payments.
Liquidity risk: Some individual bonds trade infrequently, which can make them harder to buy or sell without affecting price.
How investors use bonds
Investors use bonds for income, to reduce portfolio volatility, and to diversify equity holdings. Common strategies include buying individual bonds and holding to maturity, laddering maturities to manage reinvestment risk, or investing in bond mutual funds and exchange-traded funds (ETFs) for diversification and professional management.
Due diligence and practical tips
Check the issuer's credit quality, the bond's maturity, coupon, and call features, and how the bond fits your income needs and tax situation. Consider total return objectives: some investors focus on steady income, others on preserving capital. If you prefer simplicity, bond funds and ETFs let you buy a diversified basket of bonds with a single trade.
Bonds are not risk-free, but when chosen to match your goals and risk tolerance they can play a steady role in a balanced portfolio.