Bond Investing Basics: Types, Yields & When to Buy
Understand Treasury, corporate, and municipal bonds — how yields work, why prices fall when rates rise, and what role bonds play in a portfolio.
A bond is a loan you make to a government or corporation in exchange for regular interest payments, and its price falls when interest rates rise because newer bonds pay more.
What you'll walk away with
Skim these first — then dig into the details below.
- 1Bonds are loans that pay interest; stocks are ownership stakes.
- 2When interest rates rise, the market price of existing bonds falls.
- 3Duration measures rate sensitivity — longer duration means larger price swings.
- 4Bonds reduce portfolio volatility, which matters most near and during retirement.
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When you buy a bond, you are lending money. The issuer pays you interest on a schedule and returns your principal at maturity. That predictability is why bonds anchor a portfolio — but it comes with two risks that surprise new investors: rate risk and inflation risk.
See how adding bonds changes your projected returns and volatility in the investment calculator.
The main types of bonds
Bonds differ by who issues them, which determines both the default risk and the tax treatment.
- Treasuries: issued by the US government, the lowest default risk available, exempt from state tax.
- TIPS: Treasuries whose principal adjusts with inflation, protecting purchasing power.
- Municipal bonds: issued by states and cities, usually federally tax-free and valuable to high earners.
- Investment-grade corporate bonds: higher yields with modest default risk.
- High-yield (junk) bonds: substantially higher yields with equity-like risk.
- I bonds: inflation-linked savings bonds with purchase limits and holding rules.
Understanding duration and rate risk
Duration is the single number that tells you how much a bond or bond fund will move when rates change. It is expressed in years.
- A fund with a duration of 6 loses roughly 6% in value if rates rise one percentage point.
- Short-term bond funds (duration 1–3) are far more stable but yield less.
- Long-term bond funds (duration 15+) can move as much as stocks.
- Holding an individual bond to maturity returns your principal regardless of interim price swings.
- Bond funds have no maturity date, so price changes are permanent until rates reverse.
Individual bonds versus bond funds
For nearly all individual investors, a low-cost bond fund is the practical choice.
- Funds provide instant diversification across hundreds or thousands of issuers.
- Building a diversified individual bond ladder requires substantial capital.
- Individual Treasuries are the exception — you can buy them directly with no credit risk.
- Bond ETFs and bond mutual funds work similarly; see our ETF versus mutual fund comparison.
How much you should hold
Bonds exist to reduce the depth of your drawdowns, not to drive your returns. Match the allocation to your timeline rather than to current interest rates.
- Follow the framework in our asset allocation by age guide.
- A 60/40 stock-and-bond split remains the classic balanced portfolio.
- Money needed within one to three years belongs in cash or short-term Treasuries, not bond funds.
- Remember inflation risk — see how inflation affects savings.
Disclaimer: This page includes AI-assisted educational content reviewed for general accuracy. It is not personalized financial, tax, or legal advice. Verify numbers with a qualified professional and our editorial standards.
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