Stock market basics · updated October 21, 2026
What is a bond and how does it work
A bond is a loan you make to a government or a company: you get interest on fixed dates and your money back at maturity. The interest is called the coupon. The main risk is that the issuer can no longer pay.
How it works
The issuer (a government, a bank, a company) sells bonds with a face value, say $1,000, a yearly interest rate (the coupon) and a maturity date. Until maturity you receive the coupon, and at maturity you get the face value back. In the meantime the bond can be sold on the market, at a price that rises when market interest rates fall and drops when they rise.
Worked example
You buy a $1,000 bond with a 6% coupon, for 3 years.
Three coupons of $60, plus the $1,000 back at maturity, if the issuer pays everything.
Worth knowing
Government bonds are seen as the safest in a country, because a government can pay its debts from taxes. Corporate bonds usually pay more interest, for more risk.
When a bond can fool you
The price falls when rates rise: if you sell before maturity, you can lose money even if the issuer is sound. Inflation: a fixed 4% coupon loses buying power when inflation is 6%.
Related terms
Learn it in the Academy
Questions about a bond
What is the difference between a stock and a bond?
With a stock you become a part-owner and earn as the company does. With a bond you are a lender: you get interest agreed in advance, however well or badly the company does, as long as it can pay.
Can you lose money on a bond?
Yes, in two ways: if the issuer stops paying, or if you sell before maturity after rates have gone up and the bond's price has fallen.
These explanations are for information only. They are not a recommendation to buy or sell.
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