Learn · Understand markets
What a bond actually is
A loan you can sell. Understanding the three things that change its price explains most of what bonds do.
A bond is a loan with a tradeable certificate. The borrower promises fixed payments on fixed dates and the return of the principal at maturity. You can hold it to the end or sell it to someone else on the way.
The four terms you need
- Par value. The amount repaid at maturity, usually a round figure.
- Coupon. The fixed interest payment, set when the bond is issued and unchanging thereafter.
- Maturity. The date the principal comes back.
- Yield. Your actual return given what you paid — which is not the coupon unless you paid exactly par.
The three things that move the price
- Interest rates. If new bonds are issued paying more than yours, yours is worth less. This is the dominant force for government bonds.
- Credit. If the borrower looks less likely to pay, the price falls. This dominates for corporate bonds.
- Time. As maturity approaches, the price converges on par, because the remaining promise is smaller and nearer.
Fact
Duration measures sensitivity, not time
A longer bond loses more value for the same rise in rates, because more of its payments are further away. Duration puts a number on that sensitivity. It is expressed in years, which invites people to read it as a date, and it is not one.
A longer bond loses more value for the same rise in rates, because more of its payments are further away. Duration puts a number on that sensitivity. It is expressed in years, which invites people to read it as a date, and it is not one.
Why hold them
Because the payments are contractual rather than discretionary. A company can cut a dividend at a board meeting; skipping a bond payment is a default with legal consequences. That reliability is what bonds sell, and it is why they behave differently from shares in a downturn.
Interpretation
“Safe” is the wrong word, “different risk” is the right one
A government bond held to maturity carries little risk of not being repaid. It carries substantial risk that inflation erodes what the repayment buys, and substantial price risk if you need to sell early. Those are real risks, simply not the same ones shares carry.
A government bond held to maturity carries little risk of not being repaid. It carries substantial risk that inflation erodes what the repayment buys, and substantial price risk if you need to sell early. Those are real risks, simply not the same ones shares carry.
If you own bonds through a fund, you do not hold anything to maturity — the fund is continuously buying and selling, so the price risk never rolls off the way it does for a single bond you keep.
Education, not advice. These lessons explain how things work. They do not tell you what
to buy, and Wealth Signal does not publish recommendations. Full disclaimer.