## What is a bond - the simplest explanation for investors

Forget about complicated definitions. A bond is simply a loan that you give to a company or government. In return, you receive regular payments in the form of interest and the return of your investment at a specified date. It’s nothing more complex than that – if you lend someone $1000 with an agreement that they will return $1050 to you in a year, you are essentially conducting a transaction similar to a bond.

## How does it work in practice?

When a government or corporation needs cash, it goes to the market and issues debt securities. Each bond has three key characteristics:

**Nominal value** – it is the amount you will get back. For example, 1000 USD.

**Coupon Rate** – this is your annual profit. If you hold a bond worth 1000 USD with a 5% coupon, you will receive 50 USD annually.

**Maturity date** – the date when the issuer repays the full amount. It can be in one year, 10 years, or even 30 years.

Although bonds are initially sold directly, investors can trade them on the secondary market, just like stocks.

## What types of bonds are worth knowing?

Government bonds issued by national governments are among the safest – especially U.S. Treasury bonds.

Municipal bonds finance public projects at the local level.

Corporate bonds are securities issued by companies to cover operating expenses.

Savings bonds are aimed at ordinary investors.

## Why are US Treasury bonds so popular?

If you are looking for stability, U.S. Treasury bonds are the safest option available on the market. They come in three time variants:

**Treasury bonds** – very short-term ( under one year ). They are sold at a discount, so you buy them cheaper than their face value. The profit is the difference between the purchase price and the face value.

**Medium-term bonds** – maturity in 2, 3, 5, 7, or 10 years. The issuer pays interest every six months.

**Long-term bonds** – a horizon of 20 or 30 years with semiannual interest payments.

The safety of these papers stems from the fact that the probability of defaults by the US government is virtually zero. An additional benefit is the exemption from state and local taxes on interest. The downside? The returns are not surprising – but rather predictable.

## Bonds vs. stocks and cryptocurrencies – where to find balance?

Bonds work differently than stocks or digital assets. While stock and cryptocurrency prices can drop by 20% or 30% in a month, bonds typically move much more gently.

This makes bonds an excellent stabilizer in a portfolio. If 60% of your money is in stocks and cryptocurrencies, the remaining 40% in bonds can significantly reduce overall risk.

## Interesting relationship – bonds and interest rates

There is a fascinating inverse relationship between bond prices and interest rates. When central banks raise interest rates, new bonds offer higher yields, making older bonds with lower yields less attractive – their prices fall.

On the contrary – when interest rates fall, the prices of old bonds rise. This makes bonds a very reliable indicator of what is happening in the economy and what direction the central bank's decisions have taken.

## Should bonds be in your portfolio?

If you are an investor who does not enjoy the emotional ups and downs of the market, bonds may be the answer. They provide a steady stream of income, reduce overall risk, and act as a safety cushion during times of economic uncertainty.

The final decision depends on your goals, risk tolerance, and current economic conditions. Some investors prefer 100% stocks, while others favor a mix of 70/30 stocks and bonds. The key is to understand what each instrument offers and how it fits with the rest of your portfolio.

Knowledge about how bonds work – what a bond is, what types there are, and why bond prices change – is a fundamental skill for anyone who takes investing seriously.