Bonds explained simply
A bond is a loan you make to a government or corporation. You pay the bond's price today; in return you receive periodic coupon payments and your principal back at maturity. The bond's yield-to-maturity (YTM) is the total annualized return assuming you hold to maturity and reinvest coupons at the same rate.
Why bond prices fall when rates rise
If you own a 3% coupon bond and new bonds are issued at 5%, no one will pay full price for your 3% bond. Its market price falls until its effective yield matches the 5% market. This inverse relationship — called duration risk — is why bond funds can lose value in rising-rate environments.
Bonds in a portfolio
Bonds dampen portfolio volatility and provide predictable income. A classic allocation rule is `bond % = your age`, though many planners now use age − 20 given longer lifespans. Treasury bonds for safety, investment-grade corporates for yield, TIPS for inflation protection, and short-duration for rate-rise protection.