Bonds & Treasuries
Learn how bonds work, what Treasury securities are, and how yields, maturity, interest rates, and bond prices connect.
What Is a Bond?
A Bond Is a Form of Lending
When an investor buys a bond, they are lending money to an issuer. In return, the issuer agrees to repay the principal according to the bond's terms and may also make interest payments.
Investor
Provides money by purchasing the bond.
Issuer
Borrows the money and issues the bond.
Repayment
The bond's terms determine interest and principal payments.
How Bonds Work
Principal, Coupon, and Maturity
Principal
The amount the issuer agrees to repay according to the bond's terms.
Coupon
The stated interest payment associated with a coupon-paying bond.
Maturity
The date when the bond reaches the end of its term and principal is due.
Bond structures vary. Some bonds make periodic coupon payments, while others may be issued differently.
Treasury Securities
Debt Issued by the U.S. Government
U.S. Treasury securities are debt obligations issued by the federal government. Their names differ mainly according to maturity.
Bond Prices & Yields
Price and Yield Generally Move in Opposite Directions
When the market price of an existing bond rises, its yield falls. When its market price falls, its yield rises, all else being equal.
Bond Price
Price ↑
Yield ↓
Bond Price
Price ↓
Yield ↑
This inverse relationship is one of the most important concepts when learning about bonds.
Interest Rates & Bonds
New Rates Can Change the Value of Existing Bonds
Changes in prevailing interest rates can make the payments from existing fixed-rate bonds more or less attractive compared with newly issued bonds.
Market Rates Rise
Existing fixed-rate bonds may become less attractive relative to newly issued bonds with higher rates, putting downward pressure on their market prices.
Market Rates Fall
Existing bonds with higher fixed payments may become more attractive, which can support higher market prices.
Maturity
How Long Until Principal Is Due?
Maturity tells investors how long the bond remains outstanding. Longer-maturity bonds generally have greater sensitivity to changes in interest rates than shorter-maturity bonds, all else equal.
Short Term
Principal is due relatively soon and interest-rate sensitivity is generally lower.
Intermediate Term
Falls between short- and long-term maturities.
Long Term
Principal is due farther in the future and price sensitivity to rates is generally greater.
Credit Risk
Who Issued the Bond Matters
Credit risk is the risk that an issuer may fail to make required interest or principal payments.
U.S. Treasuries
Backed by the full faith and credit of the U.S. government and generally considered to have very low credit risk.
Corporate Bonds
Credit risk depends on the financial strength and ability of the issuing company to meet its obligations.
The Yield Curve
Compare Treasury Yields Across Maturities
The Treasury yield curve compares yields across different maturities. Its shape can reflect expectations about interest rates, inflation, growth, and economic conditions.
Why Markets Watch Treasury Yields
Treasury Yields Connect to the Broader Market
Borrowing Costs
Treasury yields can influence interest rates across many areas of the economy.
Stock Valuations
Changes in yields can affect how investors value future company earnings.
Economic Expectations
Yield movements can reflect changing expectations for growth and inflation.
Currencies
Interest-rate expectations can influence demand for currencies and global capital flows.
Key Lesson
Bonds are loans that can trade in financial markets. To understand them, look at the issuer, maturity, price, yield, interest-rate sensitivity, and credit risk together.