When a government or a corporation needs cash, it can borrow from the public by issuing bonds. A bond is a loan dressed up as a tradable security. The buyer hands over money today and receives regular interest payments, called coupons, plus the original sum back at maturity. That original sum is the face value, and the interest rate is the coupon rate.

Bonds trade on secondary markets, so their prices move. When market interest rates rise, older bonds paying lower coupons become less attractive and their prices fall. When rates drop, the reverse happens. This inverse relationship is the first thing any bond investor learns. It also explains why bond funds can lose money even though the underlying borrowers keep paying on time.

Risk varies enormously. U.S. Treasury bonds are considered nearly risk-free because the government can tax and print. Corporate bonds pay more because the company might fail. Junk bonds pay a lot more for the same reason.

Common types

• Government bonds: issued by national treasuries.
• Municipal bonds: issued by states and cities, often tax-exempt.
• Corporate bonds: issued by firms, rated by agencies like Moody's.
• Zero-coupon bonds: sold at a discount, pay no interest until maturity.