Module 3 of 8 12 min
Bonds
Lending money to governments and companies in exchange for interest.
Course lessons
Step 1
The lesson
A bond is a loan you make to a government or company. In return, the borrower pays you interest and repays the full amount on a set date.
- Face value: the amount you'll be repaid, often $1,000.
- Coupon rate: the yearly interest, as a percentage of face value.
- Maturity date: when the loan ends and you get the face value back.
U.S. Treasury bonds are backed by the federal government and considered among the safest. Corporate bonds usually pay more because companies are more likely than the government to default.
Key term
Credit risk
The chance the borrower can't pay you back. Riskier borrowers have to offer higher interest to attract lenders.
Bonds have a less obvious risk too: interest rate risk. If rates rise after you buy a bond, new bonds pay more, so your older, lower-paying bond is worth less if you sell it before maturity.
Bonds generally move less than stocks and often pay steadier income, which is why many investors hold both.
Step 2
See it
You lend $1,000 by buying a bond. The borrower pays you interest each year. At maturity, you get your $1,000 back.
You buy a $1,000 bond
You're the lender
Interest payments
For example, 4% = $40 a year
Maturity
Your $1,000 comes back
Step 3
Real-world example
Leo's 10-year bond
Leo buys a hypothetical $1,000 bond with a 4% coupon that matures in 10 years.
- He receives $40 a year in interest — $400 over 10 years.
- At maturity, he gets his $1,000 back.
- Two years in, new bonds pay 6%. If Leo wanted to sell his 4% bond early, buyers would pay less than $1,000 for it. If he holds to maturity, he still gets the full $1,000.
Step 4
Knowledge check
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 3
Step 5
Summary
A bond is a loan to a government or company that pays interest and returns the face value at maturity. Treasuries are among the safest; corporate bonds pay more for more risk. Rising rates lower the price of existing bonds. Bonds usually move less than stocks.
Step 6
What you should remember
- Bond = a loan you make. Stock = ownership.
- Coupon rate × face value = yearly interest.
- Riskier borrowers pay higher interest.
- When rates rise, existing bond prices fall.
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