A bond is a loan you make to a government or company, and you get paid back with interest

When you buy a bond, you are lending money. The borrower — usually a corporation or a government — promises to pay you back the full amount on a specific date, and to pay you interest along the way. That interest is called the coupon. You are not buying a piece of ownership like you would with a stock. You are a creditor, and the borrower is obligated to repay you before shareholders get anything.

Bonds are less volatile than stocks, which means their price does not swing as wildly day to day. They also produce steady income if you hold them until maturity. The trade-off is that bonds typically return less money over time than stocks do, and if interest rates rise after you buy, the value of your bond falls (though you still get your full amount back if you wait until maturity).

Key Takeaways

  • You can buy bonds through a brokerage account, directly from the U.S. Treasury, or through a bond fund that holds many bonds at once.
  • Treasury bonds are backed by the U.S. government and carry almost no default risk, while corporate and municipal bonds carry higher risk but usually pay more interest.
  • The price you pay for a bond on the secondary market can be higher or lower than its face value, depending on whether interest rates have risen or fallen since it was issued.
  • Holding a bond to maturity means you get your full principal back plus all promised interest, regardless of price fluctuations along the way.
  • Bond funds and ETFs let you own pieces of many bonds with a single purchase, spreading risk and requiring less money upfront than buying individual bonds.

Where to buy individual bonds

You can buy individual bonds through a brokerage account — the same type of account you would use to buy stocks. Firms like Fidelity, Charles Schwab, Vanguard, and E-Trade all allow bond purchases. You log in, search for the bond you want by issuer or maturity date, and place an order just as you would for a stock.

If you want to buy U.S. Treasury bonds, bills, or notes directly from the government without paying a broker, you can do so through TreasuryDirect.gov. You set up an account, fund it with money from your bank, and bid on new Treasury offerings. There are no fees, and you own the bonds directly rather than through a brokerage.

Municipal bonds (issued by states and cities) and corporate bonds are typically bought through a brokerage. Some brokerages charge a commission per bond purchase; others include bond trading in their flat fees. Ask your broker what they charge before you buy, because the fee can eat into your return on smaller purchases.

Understanding bond prices and yields

When a bond is first issued, you usually pay its face value — often $1,000 per bond. The issuer promises to pay you a fixed interest rate (the coupon) each year and return your $1,000 at maturity. If you buy that bond on the secondary market — meaning from another investor rather than directly from the issuer — the price can be higher or lower than $1,000.

Bond prices move opposite to interest rates. If new bonds are being issued with higher interest rates, older bonds with lower rates become less valuable, so their price drops. If interest rates fall, older bonds with higher rates become more valuable, and their price rises. The yield is the actual return you will receive, and it accounts for both the coupon and the price you paid. A bond trading at a discount (below face value) has a higher yield than its coupon rate; a bond trading at a premium (above face value) has a lower yield.

If you hold a bond until maturity, price fluctuations do not matter — you get your full face value back. But if you need to sell before maturity, you will receive whatever the market price is at that moment, which could be more or less than you paid.

Different types of bonds and their risks

Treasury bonds are issued by the U.S. government and backed by its full faith and credit. They carry virtually no default risk (the risk that the borrower will not repay you). Treasury bills mature in one year or less, Treasury notes mature in two to ten years, and Treasury bonds mature in twenty to thirty years. The longer the maturity, the higher the interest rate, because you are lending money for a longer period.

Corporate bonds are issued by companies. They typically pay higher interest than Treasuries because companies are riskier borrowers than the U.S. government. Investment-grade corporate bonds are issued by stable, profitable companies with strong credit ratings. High-yield (or junk) bonds are issued by companies with weaker finances or higher debt loads, and they pay much higher interest to compensate for the higher risk of default.

Municipal bonds are issued by states, cities, and other local governments to fund infrastructure projects. Many municipal bonds are tax-free at the federal level and sometimes at the state level too, which can make them attractive to higher-income investors. However, they carry the risk that the issuing government will face financial trouble and default.

Bond ratings from agencies like Moody's and Standard & Poor's tell you how likely a borrower is to repay. Higher ratings (AAA, AA, A, BBB) mean lower risk and lower interest rates. Lower ratings (BB and below) mean higher risk and higher interest rates. You can look up a bond's rating before you buy.

Buying bonds through funds and ETFs

If you do not want to pick individual bonds, you can buy a bond fund or bond ETF (exchange-traded fund). These are pools of many bonds managed by a professional or tracked to an index. You buy shares of the fund, and you own a small piece of all the bonds inside it. This spreads your risk across many borrowers and requires much less money upfront — you can start with as little as $50 or $100.

Bond funds come in many varieties: Treasury funds hold only government bonds, corporate bond funds hold company debt, municipal bond funds hold local government debt, and diversified bond funds hold a mix. There are also funds focused on short-term bonds (lower risk, lower return) and long-term bonds (higher risk, higher return). You can find bond funds through any brokerage, and many have very low fees.

The main difference between a bond fund and a bond ETF is how they trade. ETFs trade like stocks during market hours and have transparent pricing. Bond funds are priced once per day after the market closes. Both are good options for beginners because they require less research than picking individual bonds and offer instant diversification.

How much money you need to get your free guide

Individual Treasury bonds typically have a minimum purchase of $100 through TreasuryDirect. Corporate and municipal bonds usually have a minimum of $1,000 per bond through a brokerage, though some brokerages allow smaller purchases. If you want to buy multiple bonds to diversify, you will need several thousand dollars.

Bond funds and ETFs have much lower minimums. Many allow you to start with $50 to $500, depending on the fund. This makes them a practical choice if you have limited capital or want to test the waters before committing more money.

Keep in mind that some brokerages charge commissions on bond trades, which can range from $1 to $10 per bond or more. On a $1,000 bond, a $10 commission is 1 percent of your money, which cuts into your return. For this reason, bond funds and ETFs are often cheaper for small investors, because the fee is spread across many bonds and many shareholders.

What happens after you buy

Once you own a bond, you receive interest payments on a schedule set by the issuer — usually twice a year for corporate and Treasury bonds, and sometimes monthly for bond funds. The money lands in your brokerage account or TreasuryDirect account, and you can reinvest it or withdraw it.

If you hold the bond until maturity, you get your full principal back on the maturity date. If you sell before maturity, you receive the market price at that time, which may be higher or lower than what you paid. If you own a bond fund, there is no maturity date — the fund manager continuously buys and sells bonds to maintain the fund's strategy, and you can sell your shares whenever you want.

Bonds held in a regular taxable brokerage account are subject to income tax on the interest you receive. Treasury bond interest is exempt from state and local income tax but not federal tax. Municipal bond interest is often exempt from federal tax and sometimes state tax. If you hold bonds in a tax-advantaged account like an IRA or 401(k), you do not pay tax on the interest until you withdraw money from the account.

Frequently Asked Questions

Can I lose money on a bond?

If you hold a bond until maturity, you get your full principal back, so you cannot lose money (unless the issuer defaults, which is rare for government bonds). If you sell before maturity, you could receive less than you paid if interest rates have risen. Bond funds have no maturity date, so their value fluctuates with interest rates and credit conditions.

What is the difference between a bond and a CD?

Both are fixed-income investments, but CDs are issued by banks and insured by the FDIC up to $250,000, while bonds are issued by governments and companies and have no insurance. CDs typically have shorter terms (a few months to a few years) and lower interest rates. Bonds can have much longer terms and higher rates, but you risk losing money if you sell early.

Should I buy individual bonds or a bond fund?

Individual bonds work well if you have several thousand dollars, want predictable income, and plan to hold until maturity. Bond funds work well if you have less money, want diversification, or might need to access your money before a specific date. Many investors use both — individual bonds for stable, long-term holdings and bond funds for flexibility.

How do I know if a bond is safe?

Check the issuer's credit rating from Moody's or Standard & Poor's. Treasury bonds are the safest because they are backed by the U.S. government. Investment-grade corporate and municipal bonds (rated BBB or higher) are generally considered safe. High-yield bonds carry meaningful default risk and are better suited to experienced investors.

What happens if interest rates drop after I buy a bond?

The value of your bond rises, because it now pays a higher interest rate than new bonds being issued. If you sell, you can receive more than you paid. If you hold to maturity, the price change does not matter — you still get your full principal back.