What Is a Bond?

Imagine your friend wants to open a food truck but does not have enough money.

So they ask:

“Can I borrow $100 from you? I’ll pay you back later with extra money as a thank you.”

You agree.

Now imagine they promise:

• to pay you back in 5 years
• to give you small payments along the way

That is basically how a bond works.

A bond is essentially:

A loan made by investors to a company or government.

Instead of borrowing money from a bank:

• companies
• cities
• governments

Can borrow money from investors by issuing bonds.

When you buy a bond:

You are lending money in exchange for future payments.

These payments are called interest.

Many investors use bonds because they are often considered:

• more stable
• less volatile
• lower risk than stocks

But bonds also usually grow slower than stocks over long periods.

For example:

• stocks are often used for long-term growth
• bonds are often used for stability and income

This is why many retirement portfolios contain both:

• stocks
• bonds

As people get older, they sometimes increase their bond investments to reduce risk.

Bond prices can also move up and down depending on:

• interest rates
• inflation
• the economy

In simple terms:

A bond is when you lend money to a company or government in exchange for interest payments and repayment later.