What are bonds?
Bonds are the most boring and at the same time the largest asset class on the planet — over $130 trillion outstanding globally, more than all listed equities combined. Once you understand what a bond actually is, you understand the floor that the rest of the financial system stands on. This guide walks you through coupon, yield, price, and how the parts fit together — without scaring you with calculus.
A bond, in one sentence
A bond is an IOU: you lend money to a government or company; in return they pay you regular interest (the coupon) over the life of the bond and give your principal back at maturity. Unlike a stock, you don’t become a co-owner — you become a creditor. That’s why bonds sit higher than stocks in the bankruptcy priority list.
Example: you buy a 10-year US Treasury with a face value of $1,000 and a 4 % coupon. Every year you receive $40 of interest (paid semi-annually as $20 + $20). At the end of year 10, the Treasury repays your $1,000. Provided the US doesn’t default, the entire payoff is known in advance — that’s why bonds are called fixed-income securities.
The four core terms
- Face value (par): the amount repaid at maturity. Usually $1,000 in the US, €1,000 or €100 in Europe.
- Coupon: the nominal interest rate on the face value. A 4 % coupon on $1,000 = $40 of interest per year, fixed for the life of the bond regardless of what the price does later.
- Maturity: when the face value is repaid. Common maturities are 1, 2, 5, 10, and 30 years. The longer the maturity, the more sensitive the price is to interest-rate moves.
- Yield to maturity (YTM): the actual annualized return if you buy at today’s market price and hold until maturity. YTM equals the coupon only when the price is exactly 100 %.
Bond prices and yields always move in opposite directions. When market rates rise, existing bonds with low coupons lose price — nobody pays full price for a 2 % coupon when newly-issued bonds offer 4 %. This single rule explains 90 % of bond-fund news headlines.
Types of bonds
| Type | Issuer | Risk | Typical yield (2026) |
|---|---|---|---|
| US Treasuries / Bunds | US / German government | Very low | 2.5 – 4.5 % |
| Eurozone periphery | Italy, Spain, Greece | Low–medium | 3.0 – 5.0 % |
| Investment-grade corp | Apple, Microsoft, Siemens | Low–medium | 3.5 – 5.5 % |
| High-yield (“junk”) | Weaker companies, EM | High | 6 – 12 % |
| Inflation-linked (TIPS) | Government, indexed to CPI | Low | Real yield + inflation |
Rule of thumb: the higher the promised yield, the shakier the issuer. A 12 % bond is not a bargain; it’s a risk premium — the market expects a meaningful share of those bonds to default.
A concrete example: 10-year Treasury
You don’t pay $1,000 — you pay $950. Over 10 years you collect $40 of coupon per year ($400 total) plus a $50 capital gain at maturity. The blended return — yield to maturity — is therefore higher than the 4 % coupon.
Pros and cons
- Predictable cash flow over the bond’s life
- Lower volatility than equities (typically)
- Senior to equity in bankruptcy — higher recovery rates
- Diversification: bonds often (not always) negatively correlate with stocks
- Top-tier sovereign yields anchor the “risk-free” rate
- Interest-rate risk — rising rates cause price losses
- Inflation eats real returns (unless inflation-linked)
- Lower long-run returns than equities
- Default risk in corporates and high-yield
- Liquidity can dry up in stressed markets
How do you actually buy bonds?
- Direct purchase via your broker: US investors can buy Treasuries directly through TreasuryDirect.gov or via Fidelity, Schwab, IBKR. European investors use Trade Republic, Scalable Capital, comdirect, IBKR. Look up the bond by its CUSIP/ISIN and place a limit order.
- Bond ETFs: the most pragmatic option for most retail investors. iShares Core US Aggregate Bond (AGG), Vanguard Total Bond Market (BND), iShares Euro Govt Bond UCITS — each holds hundreds of bonds, automatically reinvests, and removes the reinvestment-at-maturity problem.
- Bond funds (mutual / UCITS): similar to ETFs but actively managed. Higher fees, occasionally better in inefficient segments (high-yield, emerging markets).
Frequently asked questions
Are bonds really safe?
“Safe” is relative. Top-tier sovereign bonds (US, Germany, Netherlands, Switzerland) are considered close to default-free — that is the textbook definition of the “risk-free rate.” Corporate and emerging-market bonds can absolutely default; Argentina has restructured its debt three times since 2001. Even top-tier bonds lose price when rates rise, so an investor who is forced to sell before maturity can realize meaningful losses.
What’s the difference between coupon and yield?
The coupon is the nominal interest rate on the face value (e.g. 4 % on $1,000 = $40 per year). The yield to maturity is the actual annualized return if you buy at today’s market price and hold to maturity. They equal each other only when the price is exactly 100 %. When the price drops below par, yield exceeds coupon; above par, yield is below coupon.
Bond ETF or individual bonds?
For most retail investors, a broad bond ETF is the cleanest answer: instant diversification, low expense ratios (typically 0.03–0.20 %), and automatic reinvestment. Individual bonds become attractive when you need a specific maturity (e.g. “I need this money in 5 years”) or when you have enough capital for the cost of due diligence to amortize.
How are bonds taxed?
Tax treatment is jurisdiction-specific. In the US, bond interest is taxed as ordinary income at the federal level; Treasuries are state-tax exempt; municipal bonds may be federally tax-exempt. In Germany, bond interest is subject to the 26.375 % flat tax (no holding-period exception). Always verify the rules for your country before sizing a bond position.
Compare brokers, model real returns, plan the bond sleeve
Bonds rarely stand alone — they are the defensive sleeve of a balanced portfolio. These free tools help you size the role bonds should play:
- Broker comparison — which platform offers cheap Treasury / Bund access?
- Real-Return Calculator — what’s left after inflation and tax?
- Correlation Matrix — how do bonds actually behave next to your equities?
- Glossary — yield-to-maturity, duration, convexity in plain English