What are bonds?
A bond is basically a loan — but you’re the lender.
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When you buy a bond, you’re lending money to a company or government.
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In return, they promise to pay you interest (called the “coupon”) and return your money later.
It’s like giving a friend $100 today, and they promise to pay you back $105 in a year.
🧱 Types of Bonds
Here are the most common types:
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Government bonds (like U.S. Treasury bonds): Issued by the federal government. Very safe.
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Municipal bonds: Issued by cities or states. Used for things like building schools or roads.
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Corporate bonds: Issued by companies to raise money. Can pay more interest but come with more risk.
📈 How Bonds Work
Every bond has three key parts:
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Face Value: The amount you’ll be paid back at the end (usually $1,000).
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Interest Rate (Coupon): What you earn each year for lending your money.
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Maturity Date: When the loan ends and they pay you back.
📌 Example:
You buy a $1,000 bond with a 5% interest rate and a 3-year maturity.
You get $50 each year, and $1,000 back at the end.
📉 Bonds and Interest Rates
Here’s where it gets interesting — and a little tricky:
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When interest rates go up, bond prices go down.
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When rates go down, bond prices go up.
Why? Because if new bonds are offering better returns, old ones become less attractive.
📌 Example:
If your bond pays 2%, but new ones pay 5%, no one wants your old bond unless it’s cheaper.
🧠 Why Investors Buy Bonds
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Steady income: Bonds pay regular interest, which can be great for retirement.
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Safety: Government bonds are very low risk.
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Balance: Bonds can protect your portfolio when stocks go down.
📊 Bonds vs. Stocks
Feature Stocks Bonds Ownership? Yes (part of a company) No (you’re lending money) Risk Higher Lower (usually) Reward Potential Higher (but more ups/downs) Lower (but more steady) Income Dividends (if any) Regular interest payments
💡 Tips for Beginners
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Don’t ignore bonds — they can help smooth out your portfolio.
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Consider bond index funds if you want simple, low-cost exposure.
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Longer-term bonds can lose more value if rates rise quickly — be cautious.
📌 Bottom Line:
Bonds are a safer, steadier way to grow your money and earn income. They don’t jump like stocks, but they help protect you when markets get bumpy.