A bond is a debt instrument through which an issuer borrows money from investors. The issuer typically promises interest payments and repayment of principal at maturity, making bondholders creditors rather than owners of the issuer.
How it works
A bond specifies terms such as face value, coupon, maturity, and payment schedule. After issuance, many bonds trade in secondary markets, so their current price changes even though contractual cash flows may stay fixed.
Bond prices and market yields generally move in opposite directions. When investors can buy newly issued bonds at higher yields, older fixed-rate bonds often need to trade at lower prices to remain competitive.
Why it matters
Treasuries have very low credit risk relative to corporate bonds, but they still carry interest-rate risk. Selling a long-duration Treasury before maturity can produce a loss when market yields rise.
Corporate bonds add credit risk: the issuer's ability to pay can deteriorate independently of the general level of interest rates.
A simple market example
U.S. Treasury data from July 2026 show how actively market yields move even when the U.S. government's promised payments on outstanding securities do not change. During the month, longer-term Treasury yields shifted as investors repriced inflation, the Middle East shock, and the expected path of Federal Reserve policy. An investor who owns an older fixed-rate Treasury does not get a higher coupon simply because market yields rise; instead, the bond's market price adjusts. That is why 'Treasury' should not be translated into 'price cannot fall.'
Common mistakes
Confusing low default risk with low price volatility. Interest-rate risk can be substantial, especially at long maturities.
Treating the coupon rate as the return every buyer will earn. Yield depends on the price paid and the future cash flows.
Frequently asked questions
Do bonds always return principal at maturity?
Only if the issuer meets its obligations. Credit quality differs greatly across issuers.
Why do bond prices fall when yields rise?
Older fixed cash flows become less attractive relative to new higher-yielding securities, so market prices adjust downward.
Is a bond ETF the same as holding one bond to maturity?
No. Most bond ETFs continually roll holdings and do not give each investor a single fixed maturity date.
Educational content only. Definitions describe common market usage and may vary by jurisdiction, instrument, or institution.