Bonds and fixed income

A bond is a loan you make to a government or company. In return they pay you regular interest (the "coupon") and repay the original amount (the "principal") on a set date.

Why investors hold bonds

• Income: predictable interest payments.
• Stability: high-quality bonds usually move less than shares and often hold up when shares fall — a portfolio cushion.
• Diversification: they balance the growth-and-risk of equities.

Key concepts

• Yield: the return relative to the bond's price.
• Prices move opposite to interest rates: when rates rise, existing bonds paying lower rates become less attractive, so their prices fall (and vice versa).
• Credit risk: the chance the borrower can't repay. Government bonds from stable countries are safest; corporate bonds pay more to compensate for higher risk. "Junk" (high-yield) bonds pay the most and risk the most.

Ways to own them

Most people buy bond funds or ETFs, which hold many bonds for instant diversification, rather than single bonds.

Key takeaway

Bonds trade some of equities' growth for steadier income and lower swings. A mix of shares and bonds is the classic way to dial a portfolio's risk up or down. See asset allocation.