8
What Is a Bond? Types, How They Work
You’re our first priority.
Every time.
NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.
We believe everyone should be able to make financial decisions with confidence. And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free.
So how do we make money? Our partners compensate us. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. Here is a list of our partners.
What Are Bonds? Types, How They Work
A bond is a loan to a company or government that pays investors a fixed rate of return. Long-term government bonds historically earn an average of 5% annual returns
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Updated · 4 min readHow is this page expert verified?
NerdWallet's content is fact-checked for accuracy, timeliness and relevance. It undergoes a thorough review process involving writers and editors to ensure the information is as clear and complete as possible.
More on our editorial rigor
Contributing Writer
Expertise CNN.com The Wall Street JournalKevin Voigt is a freelance writer covering personal loans and investing topics for NerdWallet. He previously was a reporter with The Wall Street Journal and business producer for CNN.com in Hong Kong, where he was based for nearly two decades.
Kevin Voigt is a freelance writer covering personal loans and investing topics for NerdWallet. He previously was a reporter with The Wall Street Journal and business producer for CNN.com in Hong Kong, where he was based for nearly two decades. Contributing Writer + more + more
Head of Content, Investing & Taxes
19 years of experience Expertise Retirement planning investment management investment accountsArielle O’Shea leads the investing and taxes team at NerdWallet. She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia.
Arielle O’Shea leads the investing and taxes team at NerdWallet. She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia. Published in Head of Content, Investing & Taxes + more + more
Senior Writer
6 years of experience Expertise Investing for beginners financial advice long-term investingAlana Benson is an investing writer who joined NerdWallet in 2019. She covers a wide variety of investing topics including stocks, socially responsible investing, cryptocurrency, mutual funds, HSAs and financial advice. She is also a frequent contributor to NerdWallet's "Smart Money" podcast. Alana has appeared on FOX Houston and the "PennyWise" podcast and has been quoted in MarketWatch and The Sun. Before joining NerdWallet, she wrote two books on identity theft and several young adult nonfiction titles. Her work has been featured in The New York Times, The Washington Post, The Associated Press, MSN, Yahoo Finance and MarketWatch. She is based in Wyoming.
Alana Benson is an investing writer who joined NerdWallet in 2019. She covers a wide variety of investing topics including stocks, socially responsible investing, cryptocurrency, mutual funds, HSAs and financial advice. She is also a frequent contributor to NerdWallet's "Smart Money" podcast. Alana has appeared on FOX Houston and the "PennyWise" podcast and has been quoted in MarketWatch and The Sun. Before joining NerdWallet, she wrote two books on identity theft and several young adult nonfiction titles. Her work has been featured in The New York Times, The Washington Post, The Associated Press, MSN, Yahoo Finance and MarketWatch. She is based in Wyoming. Published in Senior Writer + more + moreWhat is a bond?
What is a bond?A bond is a loan to a company or government that pays investors a fixed rate of return. The borrower uses the money to fund its operations, and the investor receives interest on the investment.
A bond is a loan to a company or government that pays investors a fixed rate of return. The borrower uses the money to fund its operations, and the investor receives interest on the investment.Bonds are a key ingredient in a balanced portfolio and one of the three main asset classes commonly used in investing. A bond's risk level is based mainly on the issuer's creditworthiness (that is, how likely they are to repay their debts). Interest rates also influence a bond's value.
Bonds are a key ingredient in a balanced portfolio and one of the three main asset classes commonly used in investing. A bond's risk level is based mainly on the issuer's creditworthiness (that is, how likely they are to repay their debts). Interest rates also influence a bond's value.The market value of a bond can change over time. Long-term government bonds historically earn an average of around 5% annual returns, compared to the average stock market return of 10%.
The market value of a bond can change over time. Long-term government bonds historically earn an average of around 5% annual returns, compared to the average stock market return of 10%.Most investment portfolios should include some bonds, whose relative safety helps balance out risks associated with stock-based investments. If stock markets plummet, bonds can help cushion the blow.
Most investment portfolios should include some bonds, whose relative safety helps balance out risks associated with stock-based investments. If stock markets plummet, bonds can help cushion the blow.» Ready to get started? See our list of the best brokers for bond investing
» Ready to get started? » Ready to get started? See our list of the best brokers for bond investingBrokerage firms
Brokerage firms
Brokerage firmson Charles Schwab's website
on E*TRADE's website
on Vanguard's website
on Fidelity's website
How do bonds work?
How do bonds work?When you buy a bond, you first pay the bond’s issuer the face value (or price) of the bond. The bond’s issuer then pays you interest for loaning them money across the life of the bond in return. These regular payments are also known as the bond’s interest rate or “coupon rate.” When the bond matures, the bond’s face value is paid back to you, the investor.
When you buy a bond, you first pay the bond’s issuer the face value (or price) of the bond. The bond’s issuer then pays you interest for loaning them money across the life of the bond in return. These regular payments are also known as the bond’s interest rate or “coupon rate.” When the bond matures, the bond’s face value is paid back to you, the investor.Example: A $10,000 bond with a 10-year maturity date and a 5% coupon rate would pay $500 per year for a decade, after which the bond's original $10,000 principal would be repaid.
Example: Example: A $10,000 bond with a 10-year maturity date and a 5% coupon rate would pay $500 per year for a decade, after which the bond's original $10,000 principal would be repaid.» Ready to add to your portfolio? See our guide on how to buy bonds
» Ready to add to your portfolio? » Ready to add to your portfolio? See our guide on how to buy bondsTypes of bonds
Types of bondsBonds — like many investments — balance risk and reward. Typically, bonds that are lower risk pay lower interest rates. Bonds that are riskier pay higher rates in exchange for the investor giving up some safety. Here are the main types of bonds you might come across in the wild.
Bonds — like many investments — balance risk and reward. Typically, bonds that are lower risk pay lower interest rates. Bonds that are riskier pay higher rates in exchange for the investor giving up some safety. Here are the main types of bonds you might come across in the wild.U.S. Treasurys
U.S. TreasurysU.S. Treasurys are considered among the safest investments because they’re issued with the full faith and credit of the U.S. government, which has always paid back its debts. However, they tend to pay lower interest rates than other investments. There are many types of Treasury debts that differ in their time to maturity and interest rates:
U.S. Treasurys are considered among the safest investments because they’re issued with the full faith and credit of the U.S. government, which has always paid back its debts. However, they tend to pay lower interest rates than other investments. There are many types of Treasury debts that differ in their time to maturity and interest rates:Treasury bills (4 weeks to 1 year).
Treasury bills (4 weeks to 1 year).Treasury notes (2 years to 10 years).
Treasury notes (2 years to 10 years).Treasury Inflation-Protected Securities (TIPS) (5 years to 30 years).
Treasury Inflation-Protected Securities (TIPS) (5 years to 30 years).Treasury bonds (20 years to 30 years).
Treasury bonds (20 years to 30 years).» See how much Treasury bonds could be worth with our Treasurys calculators
» See how much Treasury bonds could be worth with our Treasurys calculatorsCorporate bonds
Corporate bondsCompanies can issue corporate bonds when they need to raise money. For example, if a company wants to build a new plant, it may issue bonds and pay investors a stated interest rate until the bond matures. The company also repays the original principal. However, unlike buying stock in a company, purchasing a corporate bond doesn’t signal ownership.
Companies can issue corporate bonds when they need to raise money. For example, if a company wants to build a new plant, it may issue bonds and pay investors a stated interest rate until the bond matures. The company also repays the original principal. However, unlike buying stock in a company, purchasing a corporate bond doesn’t signal ownership.Corporate bonds can be either high-yield or investment-grade. High-yield means they have a lower credit rating and offer higher interest rates in exchange for a higher risk of default. Investment-grade means they have a higher credit rating and pay lower interest rates due to a lower risk of default.
Corporate bonds can be either high-yield or investment-grade. High-yield means they have a lower credit rating and offer higher interest rates in exchange for a higher risk of default. Investment-grade means they have a higher credit rating and pay lower interest rates due to a lower risk of default.» Feeling sustainable? Learn about green bonds
» Feeling sustainable? » Feeling sustainable? Learn about green bondsMunicipal bonds
Municipal bondsMunicipal bonds, also called munis, are issued by states, cities, counties and other non-federal government entities. Similar to how corporate bonds fund company projects or ventures, municipal bonds fund state or city projects, like building schools or highways.
Municipal bonds , also called munis, are issued by states, cities, counties and other non-federal government entities. Similar to how corporate bonds fund company projects or ventures, municipal bonds fund state or city projects, like building schools or highways.Municipal bonds can have tax benefits. Bondholders may not have to pay federal taxes on the interest, which can translate to a lower interest rate from the issuer. Munis may also be exempt from state and local taxes if issued in your state or city. Municipal bonds can vary in term: Short-term bonds repay their principal in one to three years, while long-term bonds can take over ten years to mature.
Municipal bonds can have tax benefits. Bondholders may not have to pay federal taxes on the interest, which can translate to a lower interest rate from the issuer. Munis may also be exempt from state and local taxes if issued in your state or city. Municipal bonds can vary in term: Short-term bonds repay their principal in one to three years, while long-term bonds can take over ten years to mature.Are bonds a good investment?
Are bonds a good investment?As a general rule of thumb, bonds can be a great addition to your investment portfolio when used strategically alongside stocks and other assets. Bonds are relatively safe and can create a balancing force within an investment portfolio focused on stocks by diversifying the portfolio’s assets and lowering its overall risk.
As a general rule of thumb, bonds can be a great addition to your investment portfolio when used strategically alongside stocks and other assets. Bonds are relatively safe and can create a balancing force within an investment portfolio focused on stocks by diversifying the portfolio’s assets and lowering its overall risk.Bonds represent the purchase of a company or public entity’s debt obligation. They can be a solid asset to own for individuals who like the idea of receiving regular, fixed income because bonds pay interest at predictable rates and intervals. Certain kinds of bonds, such as municipal bonds, also offer tax breaks.
Bonds represent the purchase of a company or public entity’s debt obligation. They can be a solid asset to own for individuals who like the idea of receiving regular, fixed income because bonds pay interest at predictable rates and intervals. Certain kinds of bonds, such as municipal bonds, also offer tax breaks.Stocks earn more interest but carry more risk, so the more time you have to ride out market fluctuations, the higher your portfolio concentration in stocks can be. But as you near your financial goal and have less time to ride out rough patches that might erode your nest egg, you'll want more bonds in your portfolio. With the safety of bonds comes lower interest rates than investing in funds or stocks.
Stocks earn more interest but carry more risk, so the more time you have to ride out market fluctuations, the higher your portfolio concentration in stocks can be. But as you near your financial goal and have less time to ride out rough patches that might erode your nest egg, you'll want more bonds in your portfolio. With the safety of bonds comes lower interest rates than investing in funds or stocks.Even though bonds are a safer investment than stocks, they still carry some risks, such as the possibility that the borrower will go bankrupt before paying off the debt. The bond issuer may be unable to pay the investor the interest and principal they owe on time, which is called default risk.
Even though bonds are a safer investment than stocks, they still carry some risks, such as the possibility that the borrower will go bankrupt before paying off the debt. The bond issuer may be unable to pay the investor the interest and principal they owe on time, which is called default risk.If you try to sell before the bond’s maturity, there is always a chance you’ll have difficulty, particularly if interest rates go up. Inflation can also reduce your purchasing power over time, making the fixed income you receive from the bond less valuable as time goes on.
If you try to sell before the bond’s maturity, there is always a chance you’ll have difficulty, particularly if interest rates go up. Inflation can also reduce your purchasing power over time, making the fixed income you receive from the bond less valuable as time goes on.» Learn more about how inflation affects the value of your money with our inflation calculator.
» Learn more » Learn more about how inflation affects the value of your money with our inflation calculator.4 key things to know about bonds
4 key things to know about bonds1. A bond's interest rate is tied to the issuer's creditworthiness
1. A bond's interest rate is tied to the issuer's creditworthinessTreasurys offer a lower rate because there's less risk the federal government will go bust. A sketchy company, on the other hand, might offer a higher rate on bonds it issues because of the increased risk that the firm could fail before paying off the debt.
Treasurys offer a lower rate because there's less risk the federal government will go bust. A sketchy company, on the other hand, might offer a higher rate on bonds it issues because of the increased risk that the firm could fail before paying off the debt.Rating agencies such as Moody’s and Standard & Poor’s grade bonds. The higher the rating, the lower the risk that the borrower will default. U.S. government bonds are typically considered the safest, followed by bonds issued by state and local governments, and then corporate bonds.
Rating agencies such as Moody’s and Standard & Poor’s grade bonds. The higher the rating, the lower the risk that the borrower will default. U.S. government bonds are typically considered the safest, followed by bonds issued by state and local governments, and then corporate bonds.2. How long you hold onto a bond matters
2. How long you hold onto a bond mattersBonds are sold for a fixed term, typically from one year to 30 years. You can resell a bond on the secondary market before it matures, but you risk not making back your original investment or principal.
Bonds are sold for a fixed term, typically from one year to 30 years. You can resell a bond on the secondary market before it matures, but you risk not making back your original investment or principal.A bond's rate is fixed at the time of purchase, and interest is paid regularly for the life of the bond. After that, the full original investment is paid back.
A bond's rate is fixed at the time of purchase, and interest is paid regularly for the life of the bond. After that, the full original investment is paid back.Alternatively, many investors buy into a bond fund that pools a variety of bonds to diversify their portfolio. However, these funds are more volatile because they don't have a fixed price or interest rate.
Alternatively, many investors buy into a bond fund that pools a variety of bonds to diversify their portfolio. However, these funds are more volatile because they don't have a fixed price or interest rate.3. Bonds often lose market value when interest rates rise
3. Bonds often lose market value when interest rates riseAs interest rates climb, so do the coupon rates of new bonds hitting the market. That makes the purchase of new bonds more attractive and diminishes the resale value of older bonds stuck at a lower interest rate, a phenomenon called interest rate risk.
As interest rates climb, so do the coupon rates of new bonds hitting the market. That makes the purchase of new bonds more attractive and diminishes the resale value of older bonds stuck at a lower interest rate, a phenomenon called interest rate risk .4. You can resell your bond
4. You can resell your bondYou don’t have to hold onto your bond until it matures, but the timing does matter. If you sell a bond when interest rates are lower than when you purchased it, you may be able to make a profit. You may take a loss if you sell when interest rates are higher.
You don’t have to hold onto your bond until it matures, but the timing does matter. If you sell a bond when interest rates are lower than when you purchased it, you may be able to make a profit. You may take a loss if you sell when interest rates are higher. About the authors Kevin Voigt Kevin Voigt Kevin Voigt is a former investing writer for NerdWallet. He has covered financial issues for more than 20 years, including for The Wall Street Journal and CNN.com. See full bio. Alana Benson Alana Benson Alana Benson is an investing writer who covers socially responsible and ESG investing, financial advice and beginner investing topics. Her work has appeared in The New York Times, The Washington Post, MSN, Yahoo Finance, MarketWatch and others. See full bio.ON THIS PAGE
What is a bond? What is a bond? How do bonds work? How do bonds work? Types of bonds Types of bonds Are bonds a good investment? Are bonds a good investment? 4 key things to know about bonds 4 key things to know about bondsON THIS PAGE
What is a bond? What is a bond? How do bonds work? How do bonds work? Types of bonds Types of bonds Are bonds a good investment? Are bonds a good investment? 4 key things to know about bonds 4 key things to know about bonds More like this Investment Basics Investing Bonds Best Robo-Advisors: Top Picks for March 2026 We spent hours testing robo-advisors to find ones that charge low fees but still offer high-quality features, including automated portfolio rebalancing, exposure to a range of asset classes and financial planning tools. Alana Benson 7 High-Dividend Stocks With Yields Over 6% (April 2026) Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube Best Brokers for Beginner Investors: Top Picks for 2026 We spent hours analyzing the best brokers for beginners to find ones that offer low costs, helpful educational content and a broad investment selection. Our testers also looked for trading platforms that are easy to navigate. Alana Benson Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana Best Brokerage Accounts for Online Investing and Stock Trading in 2026 Based on hours of analysis and hands-on testing, here are our picks for the best brokerage accounts based on their low fees, strong platforms, quality customer support and other factors. Chris Davis Best Robo-Advisors: Top Picks for March 2026 We spent hours testing robo-advisors to find ones that charge low fees but still offer high-quality features, including automated portfolio rebalancing, exposure to a range of asset classes and financial planning tools. Alana Benson 7 High-Dividend Stocks With Yields Over 6% (April 2026) Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube Best Brokers for Beginner Investors: Top Picks for 2026 We spent hours analyzing the best brokers for beginners to find ones that offer low costs, helpful educational content and a broad investment selection. Our testers also looked for trading platforms that are easy to navigate. Alana Benson Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana Best Brokerage Accounts for Online Investing and Stock Trading in 2026 Based on hours of analysis and hands-on testing, here are our picks for the best brokerage accounts based on their low fees, strong platforms, quality customer support and other factors. Chris Davis Best Robo-Advisors: Top Picks for March 2026 We spent hours testing robo-advisors to find ones that charge low fees but still offer high-quality features, including automated portfolio rebalancing, exposure to a range of asset classes and financial planning tools. Alana Benson 7 High-Dividend Stocks With Yields Over 6% (April 2026) Dividend stocks can be a great choice for investors looking for passive income and portfolio stability. Here's what to look for when evaluating dividend stocks and how to invest in them. 2 By Chris Davis, Sam Taube Best Brokers for Beginner Investors: Top Picks for 2026 We spent hours analyzing the best brokers for beginners to find ones that offer low costs, helpful educational content and a broad investment selection. Our testers also looked for trading platforms that are easy to navigate. Alana Benson Best Investments: Where to Invest in 2026 Wondering where to invest your money this year? High-yield savings accounts, CDs, bonds, funds and stocks are all considered among the best investments available. Learn more about the risks, potential returns and how to get started. 2 By Chris Davis, Alieza Durana