GLOSSARY // General Investing
Bond
A bond is a loan an investor makes to a borrower, government or corporate, in exchange for periodic interest payments (the coupon) and repayment of the original amount (the principal, or face value) at a set maturity date. Bonds are the core building block of fixed-income investing.
Bond prices move opposite to interest rates: when rates rise, existing bonds paying a lower fixed coupon become less attractive and their price falls, and vice versa. Longer-maturity bonds are more sensitive to rate changes than shorter ones, which is why duration is watched as closely as the coupon rate itself.
A 10-year bond paying a 4% coupon on $1,000 pays $40 a year. If new bonds start being issued at 5% because rates rose, the old 4% bond becomes less attractive and trades below $1,000 to compensate a buyer for the lower rate, until its effective yield roughly matches the new market rate.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.