Quick answer
A bond is a loan you make to a company or government. The issuer promises to pay interest during the bond's life and to repay the face value when it matures. You can still lose money if the issuer defaults or you sell after rates rise [1].
Key points
- A bond is a debt: you are the lender, the issuer is the borrower.
- The coupon is the interest the issuer promises; most bonds pay it every six months.
- At maturity, the issuer repays the face value, often $1,000 per bond.
- Credit risk is the chance the issuer cannot pay; credit ratings try to measure it.
- A bond's price can change before maturity, so selling early can mean a loss.
#What does it mean to own a bond?
When you buy a bond, you lend money. Investor.gov, the SEC's education site, puts it simply: "A bond is a debt security, like an IOU" [1]. The borrower is called the issuer. It may be a company, a city or state, or the US government. In return for your money, the issuer agrees to pay you interest and to give the original amount back on a fixed date [1].
That is the key difference from a stock. A shareholder owns a slice of a business and is promised nothing back (see what a stock is). A bondholder owns a claim on payments the issuer has agreed to make. FINRA, the US broker-dealer regulator, describes debt securities as instruments with "defined terms between a borrower (the issuer) and a lender (the investor)" [2].
#What are the five words on every bond?
Every bond is described by the same handful of terms. Once you know them, a bond's basic promise fits in one sentence.
| Term | What it means | Example |
|---|---|---|
| Issuer | The organization that borrows the money and owes the payments | A company, a city, or the US Treasury |
| Face value (par) | The amount the issuer repays at maturity; also the base for the coupon | $1,000 per bond |
| Coupon | The interest the issuer promises, stated as a yearly rate of face value | 4% of $1,000 = $40 a year |
| Maturity | The date the bond ends and the face value is repaid | 10 years after issue |
| Credit risk | The chance the issuer fails to pay interest or principal on time | Higher for a struggling company |
The face value, also called par value or principal, is what you get back when the bond matures [1]. The coupon is the yearly interest. FINRA's example: a bond with a par value of $1,000 and an annual rate of 4.5 percent has a coupon of $45 a year, and coupons are "generally paid out semiannually" — every six months [2]. The maturity date is set when the bond is issued; on that date the issuer pays the last interest payment plus the face value [2].
#How much cash does a bond actually pay?
Because the payments are written down in advance, you can list them before you buy. Investor.gov's corporate bond bulletin uses a bond priced at its $1,000 face value that pays 4% of face value, or $40 per year, and notes that most bonds pay semiannually, so that bond pays $20 every six months [3]. The example below extends that bond to a 10-year maturity.
Worked example
Worked example: a 10-year, 4% bond held to maturity
You buy one newly issued bond at its $1,000 face value. The coupon rate is 4%, paid every six months, and the bond matures in 10 years. The issuer makes every payment on time.
- Yearly coupon ($1,000 × 4%)
- $40
- Each six-month payment ($40 ÷ 2)
- $20
- Number of payments (10 years × 2)
- 20
- Total interest (20 × $20)
- $400
- Face value repaid at maturity
- $1,000
- Total cash received ($400 + $1,000)
- $1,400
Held to maturity with no default, you receive $1,400 in total for the $1,000 you lent. The $400 of interest is fixed in dollars — it does not grow if prices in the economy rise.
Hypothetical bond, calculated in Python before taxes and any trading costs. Selling before maturity can produce a different result because the market price changes.
Cash paid each year by the example bond
#Who issues bonds, and why?
Organizations issue bonds to borrow money. Investor.gov groups them into three main families: corporate bonds, issued by companies; municipal bonds, issued by states, cities and other local governments; and US Treasuries, issued by the US Department of the Treasury [1]. Treasuries "carry the full faith and credit of the U.S. government" [1], and FINRA notes they are "generally deemed to be free of default risk" [2]. The Treasury's own bills, notes and bonds are covered in Treasury bills, notes and bonds.
Corporate bonds also differ by maturity. Investor.gov describes short-term bonds as maturing in less than three years, medium-term in four to 10 years, and long-term in more than 10 years [3]. Some bonds pay a fixed rate for their whole life, some have floating rates reset periodically, and zero-coupon bonds pay no interest until they mature [3].
#What can go wrong with a bond?
A bond's payments are promised, not guaranteed by magic. The main risks are well documented [1]:
- Credit (default) risk — the issuer may fail to make interest or principal payments on time [1].
- Interest rate risk — if rates rise, newly issued bonds pay more, so older bonds with lower coupons become less attractive and their prices fall. Read why bond prices fall when rates rise.
- Inflation risk — inflation reduces purchasing power, which hurts anyone receiving a fixed rate of interest. See what inflation is.
- Liquidity risk — you may not find a buyer when you want to sell. See liquidity.
- Call risk — the issuer may repay ("call") the bond early, typically when rates have fallen, leaving you to reinvest at lower rates.
Credit rating agencies assign ratings based on their view of the chance that an issuer defaults [3]. Bonds with higher ratings are called investment grade. Lower-rated bonds are called high-yield or speculative, and they generally pay higher interest to compensate for greater risk [3]. A higher coupon is a sign of higher risk, not a bonus.
Bond vs stock: what you own
Bond (lender)
- Issuer owes you interest and face value
- Payments are set in advance
- Main risks: default, rising rates, inflation
- Upside is mostly limited to the promised payments
Stock (owner)
- You own part of the company
- No promised payments
- Price can rise or fall without limit on the upside
- Paid after bondholders if the company is liquidated
#Why do people hold bonds at all?
Investor.gov lists three common reasons: bonds can provide a predictable income stream, typically paying interest on a regular schedule such as every six months; holding to maturity returns the full principal if the issuer pays; and bonds "can help offset exposure to more volatile stock holdings" [1]. That last idea is part of diversification. None of this means a bond cannot lose value — it means the sources of risk are different from a stock's.
Common beginner mistakes
Treating "fixed income" as "fixed value"
The payments are fixed; the market price is not. If you need to sell before maturity, you get whatever the market pays that day, which can be below what you paid.
Chasing the highest coupon
A much higher coupon than similar bonds usually reflects higher credit risk. Check the issuer and its rating before looking at the rate.
Ignoring inflation over long maturities
A 30-year bond's coupons buy less each year if prices rise. Inflation-adjusted options such as TIPS and I bonds exist for this reason.
Forgetting the call feature
A callable bond can be repaid early, usually when rates fall. The high coupon you were counting on may stop sooner than the maturity date suggests.
What's the bottom line?
A bond is a loan with written terms: who owes you (the issuer), how much interest (the coupon), when you get your money back (maturity) and how much (face value). Those promises make bonds easier to model than stocks, but they are only as good as the issuer, and the price can move before maturity. Next, see why bond prices move when interest rates change.
Frequently asked questions
Is a bond safer than a stock?
It has different risks. A bond's payments are promised in advance, and Investor.gov notes that if a company is liquidated, its bondholders are paid first, before preferred and common stockholders [4]. But bonds can still lose value from default, rising interest rates or inflation.
What happens if I sell a bond before it matures?
You sell at the current market price, which may be more or less than face value. Prices move mainly with interest rates and the issuer's credit quality.
What is a zero-coupon bond?
A bond that pays no interest along the way. FINRA explains that you buy it at a discount from face value and are paid the face amount when it matures; the difference is your return [5].
Do all bonds pay interest every six months?
Many do, but not all. Some pay on other schedules, some have floating rates, and zero-coupon bonds pay nothing until maturity. The bond's terms state the schedule.
Sources
Grade A = primary source (regulator, government agency, official rulebook or the index provider's own documents). Numbers in brackets in the text point here.
- U.S. SEC — Investor.gov. Bonds (2026). Accessed 2026-10-03.A
- FINRA. Bonds (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. What Are Corporate Bonds? (Investor Bulletin) (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. Stocks (2026). Accessed 2026-10-03.A
- FINRA. The One-Minute Guide to Zero Coupon Bonds (2026). Accessed 2026-10-03.A
This page is general education, not personal financial, tax or legal advice. Figures in worked examples are hypothetical and calculated before taxes and fees unless stated. Rules and limits change; check the linked primary sources for the current version. How we check every page.
