What are bonds?

A bond is basically a loan, but with you on the lender's side. Someone needs money for a few years, you hand it over, and they promise to pay you back later — with interest along the way.

The piece of paper that records the deal is the bond. It has three numbers on it: how much you lent, how much interest they'll pay, and when you get the original amount back.

The biggest borrower in the world is the US government — those bonds are called Treasuries. Other countries do the same thing.

Companies issue bonds too (called corporate bonds), and so do cities and states (municipal bonds). The bigger and safer the borrower, the less interest they have to offer to convince anyone to lend.

The interest a bond pays is called a coupon. (Old paper bonds literally had coupons you clipped off.) Most bonds pay it twice a year, like clockwork.

If you own a $1,000 bond with a 4% coupon, you get $40 a year, split into two $20 payments. That cashflow is one of the main reasons people own bonds.

A bond has a maturity date — the day the borrower pays you back the original amount. Could be 2 years, 10 years, even 30 years from now.

Until that day, you collect coupons. On that day, you get your principal back and the bond is done. Of course, you can also sell the bond to someone else before maturity if you don't want to wait.

A stock makes you a part-owner of a company. If the business thrives, your share is worth more. If it struggles, the share can fall hard. The ride is bumpy.

A bond doesn't make you an owner — it makes you a lender. Your upside is capped (just coupons + principal), but your ride is usually steadier. Most long-term portfolios mix both.

Here's the part that surprises people: when interest rates go up, the price of bonds you already own goes down. New bonds are paying more, so old ones are worth a bit less.

The longer the bond's maturity, the more its price moves when rates change. A 30-year Treasury swings more than a 2-year one.

Three main risks worth knowing. Inflation erodes what those fixed payments will buy. Defaultmeans the borrower can't pay you back (rare for the US government, higher for riskier companies). Rate moves can push the price of bonds you own up or down before maturity.

For most people, the simplest way to own bonds is a low-cost bond ETF — same idea as a stock ETF, but the basket holds hundreds of bonds instead of stocks.