Bond
A bond is a fixed-income debt security in which an investor loans money to a government or corporation for a defined period at a fixed interest rate. Bonds are generally less volatile than stocks but provide lower long-term returns.
When you buy a $10,000 bond at 4% with a 10-year maturity, you receive $400/year in interest and your $10,000 back at maturity. The market price of the bond fluctuates — when interest rates rise, existing bond prices fall (and vice versa).
Bond types: government bonds (US Treasuries, UK Gilts, Canada Bonds) are the safest. Corporate bonds pay higher rates but carry default risk. Municipal bonds ("munis" in the US) are often tax-exempt at the federal level.
In a typical portfolio, bonds dampen volatility. A 60/40 stock-bond portfolio has historically had better risk-adjusted returns than 100% stocks for most investors, though the optimal split depends on time horizon and risk tolerance.
Related terms
- Asset Allocation
- Asset allocation is the percentage split of a portfolio among different asset classes — typically stocks, bonds, and cash. It is the primary driver of long-term portfolio risk and return.
- Rate of Return
- A rate of return (RoR) is the net gain or loss of an investment over a specified period, expressed as a percentage of the initial investment.
- Annual Percentage Yield (APY)
- APY is the real rate of return on a savings account or investment after compounding is factored in for one year. A higher compounding frequency means APY > APR at the same nominal rate.