Bond
A loan you make to a government or company that pays you regular interest and returns your principal on a set maturity date.
What Bond means
When you buy a bond you are lending money. The issuer — a government, municipality, or corporation — agrees to pay you interest on a schedule and repay the face value when the bond matures.
Bonds are generally less volatile than stocks and provide predictable income, which is why they anchor the conservative side of an asset allocation. They are not risk-free: the issuer can default, and rising interest rates push the market price of existing bonds down, since newer bonds pay more.
That inverse relationship matters if you sell before maturity. Hold a bond to maturity and short-term price swings are irrelevant — you get the face value back, assuming the issuer stays solvent.
Most individual investors get bond exposure through bond funds or ETFs rather than buying individual issues.
Related terms
Asset Allocation
How you divide a portfolio among stocks, bonds, cash, and other asset types — the single biggest driver of its risk and return.
Diversification
Spreading money across many investments so that a loss in any one of them does limited damage to the whole portfolio.
Interest Rate
The percentage charged for borrowing money or paid for depositing it, quoted as an annual figure.
ETF (Exchange-Traded Fund)
A fund holding a basket of investments that trades on an exchange like a single stock, usually tracking an index at low cost.
Index Fund
A fund that mechanically tracks a market index rather than picking stocks, giving broad exposure at very low cost.
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