Bonds: lending your money

How a bond works

When you buy a bond, you're lending money. The borrower, a government or a company, promises to pay interest on a schedule and repay the full amount on a set date, called maturity.

Not all bonds are equally safe

• US Treasury bonds are backed by the US government and considered among the safest.
• Corporate bonds usually pay more, because companies are more likely than the government to miss payments.
• High-yield (junk) bonds pay the most because the borrowers are the riskiest.

Higher interest is compensation for more risk. A bond paying far more than others is telling you something.

Why bond prices move

Bonds can be sold before maturity, and their prices change. When interest rates rise, older bonds paying lower rates become less attractive, so their prices fall. When rates fall, older bonds become more valuable. Prices and rates move in opposite directions.

Bonds generally swing less than stocks and have earned less over long periods. Many portfolios hold some bonds to soften the ride, especially as a goal gets closer.