Bonds often sound technical, yet the core idea is simple. A bond is a loan in which an investor lends money to a government, municipality, or company for a set period. In exchange, the issuer promises regular interest payments and the return of the original amount at the end of that period.
This article explains the basics of bonds, coupons, and maturities in plain English. It describes how these features work and where people usually encounter them. It does not tell you what to buy or how to invest. The goal is education only.
What is a bond?
U.S. regulators describe a bond as a debt security, similar to an IOU. When you buy a bond, you lend money to the issuer, which may be a corporation, a city, a state, or the federal government.
Three basic elements sit at the center of almost every plain-vanilla bond:
- Face value (par value) – the amount the issuer promises to repay at maturity, often $1,000 per bond in U.S. markets.
- Coupon – the stated interest rate on that face value.
- Maturity date – the date when the issuer plans to repay that face value.
You can think of it as a structured loan:
- You lend $1,000 today.
- The bond pays periodic interest, such as 4% per year.
- At the maturity date, the issuer aims to send back the $1,000 face value.
Bond funds and bond ETFs hold many such individual bonds inside one product. For a basic look at pooled vehicles that invest in bonds, you can read the articles on What Is a Mutual Fund? and Exchange-Traded Funds (ETFs) Explained: A Beginner-Friendly Overview.
Coupons: how bonds pay interest
FINRA, the main self-regulatory organization for U.S. broker-dealers, describes the coupon as the annual interest payment expressed as a percentage of the bond’s par value.
A simple example:
- Par value: $1,000
- Coupon rate: 4.5%
- Annual coupon: $45
Many U.S. bonds pay this coupon twice a year, so that $45 becomes two payments of $22.50.
A few important points:
- The coupon rate is set when the bond is issued.
- The coupon amount usually stays the same over the life of a standard fixed-rate bond.
- The market price of the bond can move up or down, but the coupon is still based on par value.
Not every bond pays regular interest:
- Zero-coupon bonds pay no periodic interest. Instead, the investor buys the bond at a discount and receives the full par value at maturity.
Major firms such as Vanguard and Schwab explain coupons in the same way: a bond’s coupon is the fixed rate used to calculate the cash interest payments promised to the bondholder.
Maturity: how long the loan lasts
Vanguard describes a bond’s maturity as the length of time until the investor should receive the bond’s face value back.
Industry sources often group maturities into three buckets:
- Short-term: up to about 2–3 years
- Intermediate-term: roughly 3 to 10 years
- Long-term: more than 10 years, sometimes 20 or 30 years
U.S. Treasury securities provide clear examples:
- Treasury notes typically mature in 2 to 10 years.
- Treasury bonds usually mature in more than 10 years, commonly 30 years, with interest paid every six months.
The maturity date matters because it marks the time when:
- Regular coupon payments stop.
- The issuer is scheduled to return the par value to the investor.
Many bonds also carry call features, which allow the issuer to repay the bond earlier than the scheduled maturity date under certain conditions. Educational pieces from Kiplinger and others note that issuers often call bonds when interest rates fall and they can refinance at lower rates.
Who issues bonds?
Investor.gov and FINRA outline three common issuer groups in the U.S.:
- U.S. Treasury and federal agencies
- Treasuries help finance federal government activities.
- Savings bonds and other Treasury securities come from the U.S. Department of the Treasury.
- States and municipalities (munis)
- States, cities, and local agencies issue municipal bonds to fund schools, highways, and other public projects.
- Corporations
- Companies issue corporate bonds to raise money for expansion, refinancing, or other business needs.
Each issuer type has its own legal and tax framework. For example, many municipal bonds offer interest that is exempt from federal income tax, while corporate bond interest is usually taxable.
This article only describes these differences. It does not suggest which type fits any particular person or account.
Why bond prices move
A key idea in fixed income is the relationship between interest rates and bond prices. Investor education from FINRA, Vanguard, and Kiplinger all highlight the same pattern: when prevailing interest rates rise, prices of existing bonds tend to fall, and when rates fall, existing bond prices often rise.
A simple way to picture it:
- Suppose existing bonds in the market pay 3%.
- New bonds start to come out at 5%.
- Investors may not want older 3% bonds as much unless their prices drop to offer a competitive yield.
The reverse also holds. If new bonds come with lower coupons than older ones, those older bonds can trade at a premium because their coupons look more attractive.
This price behavior does not make bonds “safe” or “unsafe” on its own. It is simply how fixed-income markets adjust to new interest-rate information.
Main risks in plain language
Regulators such as the SEC and FINRA describe several key risks that come with bonds and bond funds.
The most common categories include:
- Credit risk (default risk)
- The issuer may struggle to meet interest payments or to repay principal.
- Corporate bonds and some municipal bonds carry this type of risk to varying degrees.
- Credit ratings from agencies try to summarize this risk, but they do not guarantee outcomes.
- Interest-rate risk
- When market interest rates change, bond prices move in the opposite direction.
- Longer-maturity bonds usually react more strongly to rate changes than shorter-maturity bonds.
- Inflation risk
- If inflation rises faster than the bond’s yield, the purchasing power of the interest and principal can shrink over time.
- Call and reinvestment risk
- Callable bonds allow the issuer to repay early, often when rates fall.
- When that happens, investors may need to reinvest at lower prevailing rates.
None of these risks vanish just because a bond looks “safe” on the surface. SEC materials remind investors that all securities, including bonds and bond funds, carry some type of risk.
Where most people meet bonds in real life
Many U.S. investors never buy a single bond directly. Instead, they encounter bonds inside pooled products:
- Bond mutual funds
- Bond ETFs
- Balanced or multi-asset funds that mix stocks and bonds
- Target-date or retirement funds that hold bond exposures as part of a long-term glide path
These vehicles often sit inside:
- Workplace plans such as 401(k)s
- Individual Retirement Accounts (IRAs)
- Taxable brokerage accounts
If you want a gentle introduction to how these pooled products work, you can read the articles on What Is a Mutual Fund?, Mutual Funds and ETFs: Key Differences Side by Side, and What Is a Retirement Fund?. For a broader perspective on combining different asset types, see What Is a Diversified Portfolio?.
Conclusion
Bonds sit at the heart of fixed-income investing, but their moving parts follow a clear logic. SEC and FINRA materials describe a bond as a loan with three core features: a par value that should come back at maturity, a coupon that defines the interest payments, and a maturity date that sets the life of the loan.
Large firms like Vanguard and Schwab then build on that foundation to explain how interest rates, bond prices, and different maturities interact over time.
By understanding coupons and maturities—and the main risks linked to credit and interest rates—beginners can read bond descriptions, fund fact sheets, and educational resources with more confidence, even without making any investing decisions based on this information alone.