What is the difference between a Treasury bond and a corporate bond?

Treasury bonds are issued by the US federal government and are considered risk-free (the government can print money to repay). Corporate bonds are issued by companies and carry credit risk — the risk the issuer defaults. Because of this extra risk, corporate bonds pay higher interest rates than Treasuries of equivalent maturity. The difference is called the credit spread.

Are bonds safe investments?

Government bonds (US Treasuries, I-Bonds, TIPS) are the safest investments available — virtually zero default risk. Investment-grade corporate bonds are generally safe but carry modest credit risk. High-yield (junk) bonds carry significant credit risk. All bonds carry interest rate risk — their prices fluctuate as interest rates change. For the safest bonds, the main risk is that your purchasing power erodes due to inflation if the bond's yield is below inflation.

How Bonds Work: A Beginner's Guide to Fixed Income

Q: What is a bond in simple terms?

A bond is a loan you make to a government or company. They borrow your money for a set period, pay you interest at regular intervals (coupon payments), and return your original investment (face value) when the bond matures. Bonds are called fixed income investments because the interest payments are predetermined and don't change.

Q: Why do bond prices fall when interest rates rise?

When new bonds are issued at higher interest rates, older bonds paying lower rates become less attractive. Their prices fall in the secondary market until their yield equals the new market rate. This inverse relationship is fundamental to bond pricing: yield = annual coupon / price. Higher price means lower yield, lower price means higher yield.

Calculate the yield on any bond: Bond Yield Calculator →

The Basic Structure: What You're Buying When You Buy a Bond

When a company or government needs to borrow money, it has two main options: take a bank loan or issue bonds. A bond is essentially a tradeable IOU. The issuer borrows a set amount (the face value), agrees to pay interest at a fixed rate (the coupon) at regular intervals, and promises to return the face value on a specific date (the maturity date). You, as the bondholder, are the lender.

Most US corporate and government bonds have a face value of $1,000. If a company issues a 10-year bond with a 5% coupon rate, it pays you $50/year (usually $25 every 6 months) and returns your $1,000 at the end of 10 years. The income stream is fixed and predetermined — hence the name "fixed income."

The Four Key Terms: Face Value, Coupon, Maturity, and Yield

Face Value (Par Value)

The face value is the amount you receive when the bond matures — not necessarily the price you paid for it. For most US bonds, face value is $1,000. It's also the amount used to calculate coupon payments: a 5% coupon on a $1,000 face value bond pays $50/year, regardless of what you paid for the bond in the market.

Coupon Rate

The coupon rate is the annual interest rate, expressed as a percentage of face value. It's fixed for the life of the bond. A 5% coupon bond always pays 5% of $1,000 = $50/year. The name comes from the era when physical bond certificates had detachable coupons that investors clipped and submitted to receive interest payments — a practice long since replaced by electronic payments.

Maturity Date

The maturity date is when the bond expires and the issuer repays the face value. Short-term bonds mature in 1–3 years (Treasury bills and notes). Medium-term bonds mature in 3–10 years. Long-term bonds mature in 10–30 years. The longer the maturity, the more interest rate risk the bond carries — its price can fluctuate more as rates change over a longer period.

Yield

Yield is the actual return you receive based on the price you paid, not the coupon rate. If you buy a $1,000 face-value, 5% coupon bond for $950, your current yield is $50 ÷ $950 = 5.26% — higher than the coupon rate because you paid less than face value. Yield to maturity (YTM) also includes the $50 gain you'll receive when the bond matures and you collect $1,000. See the Bond Yield Calculator to see exactly how current yield and YTM differ for any bond.

Why Bond Prices Move Opposite to Interest Rates

This is the concept that trips up most new bond investors. When interest rates rise, bond prices fall. When rates fall, bond prices rise. Here's why:

Imagine you own a $1,000 bond paying 3%. Interest rates in the economy then rise to 5%. Newly issued bonds now pay 5%. Your 3% bond looks unattractive by comparison — who would pay $1,000 for a bond paying $30/year when they could buy a new bond paying $50/year for the same price? Your bond's price falls in the secondary market until its yield equals approximately 5%. At that price, new buyers get a 5% return through a combination of the $30 coupon plus the capital gain they'll receive at maturity when they collect $1,000.

The opposite happens when rates fall: your 3% bond becomes more valuable because new bonds only pay 2%. Investors bid up your bond's price until its yield falls to match the new market rate.

Types of Bonds

US Treasury Bonds, Notes, and Bills

Issued by the US federal government. Considered the safest investment in the world because the US government can print currency to meet obligations. Treasury Bills (T-bills) mature in 4, 8, 13, 26, or 52 weeks. Treasury Notes mature in 2, 3, 5, 7, or 10 years. Treasury Bonds mature in 20 or 30 years. Treasury interest is exempt from state and local taxes. TIPS (Treasury Inflation-Protected Securities) adjust both principal and interest for inflation.

Corporate Bonds

Issued by companies to fund operations, acquisitions, or capital expenditures. Pay higher interest than Treasuries because of credit risk — the possibility the company defaults. Credit rating agencies (Moody's, S&P, Fitch) rate corporate bonds from AAA (highest quality) to D (default). Investment-grade bonds (BBB- and above) are considered relatively safe. High-yield or "junk" bonds (below BBB-) carry significant credit risk but pay higher yields.

Municipal Bonds

Issued by state and local governments. Key feature: interest is usually exempt from federal income tax and often state income tax too. This makes them especially attractive for investors in high tax brackets. A 4% municipal bond yield is equivalent to a 5.7% taxable yield for someone in the 30% federal tax bracket.

For most investors, bond funds are more practical than individual bonds. A total bond market index fund (like Vanguard's BND) provides instant diversification across thousands of bonds, automatic reinvestment of coupon payments, and low costs (0.03%–0.05% expense ratio). Individual bond buying makes more sense for specific laddering strategies or tax-loss harvesting, but for general portfolio bond exposure, a low-cost fund is simpler and equally effective.

To understand where bonds fit alongside stocks in a portfolio, see our comparison guide on bonds vs. stocks. For a deep dive into how YTM is calculated and what it tells you, read what is yield to maturity.

Frequently Asked Questions

What is a bond in simple terms?

A bond is a loan you make to a company or government. They borrow your money for a set period (the term), pay you regular interest (coupon payments), and return your original investment (face value) when the bond matures. Bonds are called fixed income because the interest payments are predetermined and don't change over the bond's life.

Why do bond prices fall when interest rates rise?

When interest rates rise, newly issued bonds offer higher coupon rates. Existing bonds with lower rates become less attractive, so their prices fall in the secondary market until their yield (coupon ÷ price) matches the new market rate. It's a mathematical certainty: the income stream is fixed, so price must adjust to deliver the market yield.

What is the difference between Treasury bonds and corporate bonds?

Treasury bonds are issued by the US federal government — considered risk-free because the government can print currency. Corporate bonds are issued by companies and carry credit risk (default risk). Corporate bonds pay higher interest than Treasuries to compensate for this risk. The difference in yield is called the credit spread.

Are bonds safe?

Government bonds have virtually zero default risk and are among the safest investments available. Their main risks are interest rate risk (price falls when rates rise) and inflation risk (fixed income loses purchasing power if inflation is high). Investment-grade corporate bonds are generally safe but add modest credit risk. High-yield bonds carry significant credit risk. For most investors, the relevant "safety" is relative to stocks — bonds are less volatile, especially during equity market downturns.

Should I buy individual bonds or bond funds?

For most investors, a low-cost bond index fund (like Vanguard BND or iShares AGG) is simpler and equally effective as individual bonds. Funds provide instant diversification, automatic reinvestment, and very low expense ratios (0.03%–0.05%). Individual bonds make more sense for a CD-like laddering strategy (knowing your exact return and maturity date) or for tax-loss harvesting in taxable accounts.