Lessons

Block 02 · 02

Bonds and Yield

US government bonds, coupons, yield to maturity, and why prices fall when the Fed raises rates.

15 minBeginnerResearch Desk
Illustration for “Bonds and Yield”
Diagram · How a bond works
01You lend moneyYou buy a $1,000 face-value bond — from the US government or a large company.
02You get a couponA fixed rate is paid on schedule, usually twice a year.
03Face value returnedOn the maturity date the issuer repays the full debt amount.
Price below parYield above the coupon
Bought at $950, get $1,000 back — the difference adds to your return.
Price above parYield below the coupon
Bought at $1,050 — the final rate is counted from your entry price.

A bond is a payment schedule known in advance. You see the return before you buy.

In plain words

Picture a $1,000 US Treasury issue. You put in that amount and, in exchange, get a promise: twice a year you're paid a coupon — say, $22.50 — and on the set date you get the full $1,000 back. Everything is spelled out in advance in the terms of the issue — amount, dates, rate. This is exactly what makes up the US debt market, worth over $50 trillion, in which pension funds, banks, and central banks from other countries all participate.

Video breakdown
Notes

A bond is when money is borrowed from you. The borrower is the US government or a large company, and you receive a predetermined interest rate on a set schedule.

The key difference from owning a stake in a business. Everything here is calculated in advance: the amount, the rate, payment dates, and the repayment date. You know your return before you even buy.

Who borrows. The US Treasury is the largest borrower in the world: the money funds roads, defense, and infrastructure. Corporations borrow to build factories and fund development, because it's cheaper than selling a stake in the business.

Why bonds belong in a portfolio. They provide a predictable cash flow that arrives regardless of how the stock market moves, and they act as an anchor for your capital: part of the portfolio always works at a fixed rate.

Try it yourself

Bond: what a fixed rate earns on your amount

$0

Principal $10,000 + $2,500 of income — at a fixed rate for the whole term.

A bond is a rate fixed for the whole term, not a bet on price swings. Move the amount, rate and term — the income updates instantly.

Common beginner mistakes

Common beginner mistakes

  • Calculating yield from the coupon alone, without accounting for the purchase price
  • Ignoring the maturity date: it determines when your money comes back
  • Not watching the Fed's rate — it sets the level for new issues
  • Holding only one maturity when payments could be spread across several years