Bond

A bond is a loan: an investor lends money to a government or company, which agrees to pay periodic interest — called the coupon — over a set period and return the original amount, the principal, when the bond matures.

A typical bond has a face value (say, $1,000), a coupon rate (say, 5%, meaning $50 a year), and a maturity date years or decades out. Buy that bond and hold it to maturity, and barring a default, you know in advance exactly what you'll receive and when — a very different promise from a stock, which offers no such guarantee.

Why bond prices move opposite to interest rates

Bonds trade in the market before maturity, and their prices move inversely to prevailing interest rates. If rates rise after you buy a 5% bond, newly issued bonds now offer more, so your older, lower-paying bond becomes less attractive and its price falls to compensate — a buyer will only take it off your hands at a discount that brings its effective yield up to match. If rates fall, the reverse happens and your existing bond becomes more valuable, since it's now paying more than what's newly available.

The risks bonds still carry

Bonds are often described as safer than stocks, and in the sense of promised, contractual payments, they generally are. But "safer" isn't "risk-free." A bond can lose value if rates rise before maturity, if the borrower's credit quality deteriorates, or if inflation erodes the purchasing power of the fixed payments you're owed. A government bond and a bond issued by a financially shaky company carry very different odds of actually being paid back in full.