What Are Bonds?

  Bonds — also known as fixed income securities — are investments where you lend money to a company or a government in exchange for regular interest payments and the full return of your principal at a future date.

In a way, you become the lender. You loan money today, and in return, you receive periodic interest payments (called coupons) and your initial investment back when the bond reaches maturity.

How Do Bonds Work?

  Think of a bond as an agreement between two parties:

● The issuer: A company or government that needs to raise funds.

● The investor: You, or any buyer of the bond, who lends money in exchange for future payments.

Here are a few key terms to know:

● Face value (or principal): The amount you lend when buying the bond.

● Coupon rate: The fixed interest rate you receive, usually semiannually.

● Maturity date: When the bond "expires" and the issuer repays the face value.

Why Invest in Bonds?

  Bonds are often seen as more stable than stocks, making them a popular choice for conservative investors. They offer:

● Predictable income: Interest is paid on fixed dates.

● Lower risk: Returns are known in advance.

● Portfolio diversification: Bonds balance out the volatility of equities.

● Liquidity: Many bonds can be bought or sold easily in the secondary market.

Of course, no investment is risk-free — and that includes bonds. Understanding what drives their performance is key.

What Determines a Bond’s Interest Rate?

  The return you get from a bond depends on several factors:

1. Risk-free rate

  This is the baseline return considered "safe," typically based on U.S. Treasury bonds. Bonds with higher risk must offer a premium — called a spread — over this benchmark.

2. Credit risk

  This is the likelihood that the issuer may default. Credit rating agencies like Moody’s, Fitch, and S&P evaluate issuers and assign them ratings. The better the rating, the lower the risk.

3. Maturity

  The longer a bond's term, the greater the risk of interest rate changes. Longer-term bonds usually pay more interest to compensate.

4. Economic conditions

  Inflation, central bank policy, and economic outlooks can all influence interest rates and bond yields.

5. Supply and demand

  When many investors want bonds, issuers can offer lower yields. When demand is low, yields need to rise to attract buyers.

6. Liquidity

  The easier it is to trade a bond, the lower the yield tends to be. Highly liquid bonds are often in high demand.

Types of Bonds

Government Bonds

  Issued by national governments — like U.S. Treasuries — and categorized by maturity:

● Treasury Bills (T-Bills): Up to 1 year

● Treasury Notes (T-Notes): 1 to 10 years

● Treasury Bonds (T-Bonds): More than 10 years

Corporate Bonds

  Issued by companies to raise capital. These usually offer higher yields than government bonds, but also come with greater risk.

How Do You Earn Money from Bonds?

1. Interest payments (coupons)

  You receive regular interest, typically every six months.

2. Capital gains

  If you sell a bond for more than you paid, you earn a profit. This often happens when market interest rates fall and your bond becomes more valuable.

3. Reinvesting coupons

  You can reinvest the interest you receive to compound your returns over time.

Common Bond Terms – Glossary

What Is Bond Seniority?

  If a company goes bankrupt, not all investors are repaid equally. Seniority determines who gets paid first.

How Do Bond Ratings Work?

  Credit rating agencies assess the issuer’s ability to repay. Based on their ratings, bonds are classified as:

● Investment Grade (IG): Lower risk, rated BBB- or higher by Fitch/S&P, or Baa3 or higher by Moody’s.

● High Yield (HY): Also known as “junk bonds,” these carry more risk but offer higher potential returns.

Final Thoughts — Are Bonds Worth It?

  If you're looking for steady returns, less volatility, and predictable income, bonds can be a smart addition to your investment strategy. They offer a way to earn interest while helping governments and businesses raise capital.

That said, it’s essential to understand the risks — especially credit risk and how interest rates impact bond prices. The more you know about how bonds work, the more confident and strategic your investment decisions will be.

At Inter, we’re here to help you make informed choices, diversify your portfolio, and grow your money with clarity and security. Now that you know the basics of bonds, you’re ready to explore new opportunities in the fixed income market.