What Are the Main Parts of a Bond?
Face value (par) is amount repaid at maturity unless defaulted. Coupon is the stated interest rate on par, paid on a schedule. Maturity is when principal is due. Yield reflects market price versus future cash flows—when price rises above par, yield falls and vice versa. Credit quality reflects default risk, rated by agencies for many issuers.
Bonds are legal contracts; equity is ownership. Bondholders have priority over stockholders in bankruptcy, which is why yields are typically lower than long-term equity return expectations for comparable risk periods.
Why Do Bond Prices Move?
Interest rate changes dominate investment-grade government and high-quality corporate bonds: when rates rise, existing bonds with lower coupons fall in price to offer competitive yields. Credit spreads widen when investors demand more yield for default risk. Inflation expectations and central bank policy feed both channels.
Duration measures sensitivity to rate moves—longer maturity and lower coupon mean more price volatility for a given rate change.
How Do Traders and Investors Use Bonds?
Long-term investors hold bonds for income and diversification versus stocks. Active traders may trade bond ETFs (TLT, HYG) for rate or credit views with equity-like execution. Corporate bond desks are institutional; retail often accesses credit through funds or ETFs rather than individual CUSIPs.
Flight-to-quality flows can lift treasuries when stocks sell off—understanding bonds clarifies macro days when stocks and “safe” assets diverge.
What Risks Should You Understand?
Interest rate risk, credit/default risk, call risk (issuer retires early), liquidity risk in thin issues, and inflation eroding real returns. High-yield bonds pay more but behave partly like equities in stress. Concentrated single-issuer bond bets carry idiosyncratic default risk.
For active equity traders, bonds matter as macro context: yields rising quickly can pressure growth stock multiples; credit spreads blowing out can signal risk-off regimes.
How Do Bonds Compare to Stocks and Treasuries?
Stocks offer residual growth; bonds offer contractual cash flows with capped upside unless distressed. Treasuries are U.S. government bonds—the benchmark risk-free rate in many models. Mutual funds and ETFs package bonds for diversified access.
How Do Bond ETFs Simplify Access for Traders?
Instead of trading individual CUSIPs, traders use ETFs to express duration or credit views with equity-like hours and margin rules. Know whether the ETF holds government, investment-grade, or high-yield debt—the risk profile differs sharply even when tickers look similar on a watchlist. On Fed days, bond and equity reactions often tell the same macro story from different angles.