Key takeaways
- A bond is a loan you make to a government or company in exchange for regular interest and your money back at maturity.
- Bond prices move opposite to interest rates. If rates rise from 4% to 5%, a 10-year, 4% bond’s price falls to about $922 per $1,000.
- Yields are meaningful again: the 6-month T-bill paid about 4.25% and the 10-year Treasury about 5.1% in late October 2026; new I bonds earn 5.51% through April 2027.
- Low-cost bond funds and ETFs are the easiest way for most people to own a diversified mix.
A bond is an IOU: you lend money to the U.S. Treasury, a city or a company, and it pays you interest on a schedule and returns your principal on a set date. High-quality bonds usually pay steadier income and fall less than stocks in downturns, which is why they’re the stabilizer in most portfolios. The catch is that their prices drop when interest rates rise.
After years of near-zero yields, bonds now pay real income. With the Fed’s target range at 3.75%–4.00% and longer-term Treasury yields above 5% this fall, it’s worth understanding how bonds work, which types fit which goals, and how to buy them without overpaying.
How a bond works
- Face value (par): the amount repaid at maturity, often $1,000 per bond.
- Coupon rate: the annual interest rate on the face value. A 4% coupon on $1,000 pays $40 a year, usually as two $20 payments.
- Maturity: when the bond ends and you get the face value back. Short-term is generally under 3 years; long-term is 10 years or more.
- Yield: your actual return based on the price you pay. Buy below $1,000 and your yield is higher than the coupon; buy above and it’s lower.
- Credit rating: agencies grade issuers. BBB- (or Baa3) and above is “investment grade”; anything lower is high-yield, or “junk.”
Why bond prices fall when rates rise
Suppose you own a 10-year, $1,000 bond paying 4%. If new bonds start paying 5%, nobody will pay full price for yours. Its market value drops to about $922.05, so the new buyer earns roughly 5%. If you hold to maturity, you still get the full $1,000 back. The longer the bond, the bigger the swing:
| 4% bond, $1,000 face value | Price if rates rise to 5% | Change |
|---|---|---|
| 2 years to maturity | $981.19 | About −1.9% |
| 10 years to maturity | $922.05 | About −7.8% |
| 30 years to maturity | $845.46 | About −15.5% |
It works in reverse, too. If rates fall to 3%, that same 10-year bond rises to about $1,085.84. A fund’s “duration,” listed on its fact sheet, gives a rough guide: a duration of 6 means about a 6% price drop for each 1-point rise in rates.
Rate check: the Fed held its target range at 3.75%–4.00% on Oct. 28, 2026, while the 10-year Treasury yield traded around 5.1% in mid-October. When long-term yields sit above short-term ones, longer bonds pay more income, but they also carry more price risk if rates keep climbing.
Main types of bonds
| Type | Issuer | Risk | Tax notes |
|---|---|---|---|
| Treasury bills, notes, bonds | U.S. government | Lowest credit risk | Exempt from state and local tax |
| TIPS | U.S. government | Low; principal adjusts for inflation | Exempt from state and local tax; inflation adjustments taxed yearly |
| Series I savings bonds | U.S. government | Very low; not traded, can’t lose value | Federal tax can be deferred until cashed |
| Municipal bonds | States and cities | Low to moderate | Often exempt from federal tax, sometimes state tax |
| Investment-grade corporate | Financially strong companies | Moderate | Fully taxable |
| High-yield (“junk”) | Weaker companies | High | Fully taxable |
I bonds bought from November 2026 through April 2027 earn a 5.51% composite rate, including a 1.40% fixed rate that lasts for the life of the bond. You can buy up to $10,000 a year per person through TreasuryDirect, must hold them at least one year, and lose the last three months of interest if you cash out before five years. Learn more in our guide to inflation-linked bonds.
Comparing yields after taxes
The highest stated yield isn’t always the best deal once taxes are counted. Two quick examples:
- Municipal bonds: a muni yielding 3.5% tax-free is worth about 4.61% to someone in the 24% federal bracket (3.5 ÷ (1 − 0.24)). A taxable bond would need to pay more than that to come out ahead.
- Treasuries vs. CDs: a 4.25% T-bill is free of state income tax. In a state with a 5% income tax, a fully taxable CD would need to pay about 4.47% to match it. Compare current offers on our best CD rates page.
Key bond risks
- Interest rate risk: prices fall when rates rise, more so for long maturities.
- Credit risk: the issuer could miss payments. Ratings help measure this, and higher yields usually mean higher risk.
- Inflation risk: fixed payments buy less over time. TIPS and I bonds address this.
- Call risk: some issuers can repay early when rates drop, cutting off your higher income.
- Liquidity risk: individual corporate and municipal bonds can be costly to sell before maturity.
How to buy bonds
- Bond funds and ETFs: instant diversification, low minimums and daily liquidity. A total bond market index fund is a common core holding.
- TreasuryDirect: buy Treasuries and I bonds directly from the government with no fees.
- Brokerage account: buy new-issue Treasuries commission-free at most major brokers, or individual corporates and munis (check the markup).
- Target-date or balanced funds: hold bonds for you and adjust the mix automatically.
Worked example: a simple bond ladder
A ladder spreads money across maturities so some cash comes due every year. With $25,000, you could buy $5,000 each of Treasuries maturing in 1, 2, 3, 4 and 5 years. Each year one rung matures; you either spend it or buy a new 5-year bond at whatever rates are then. You get predictable cash, you aren’t forced to sell when prices are down, and you avoid betting everything on one interest-rate moment.
How much of your portfolio should be in bonds?
It depends on your age, goals and how you’d react to a big stock decline. Younger investors often hold mostly stocks; people nearing retirement usually add bonds to reduce swings. A 60% stock / 40% bond mix is a classic middle ground, and many target-date funds hold well over half in bonds by the target year. The bucket strategy in our investment strategies guide shows one way to organize it. For money you need within a year or two, a high-yield savings account or a no-penalty CD may be simpler.
Tip: hold taxable bond funds inside an IRA or 401(k) when you can. Their interest is taxed as ordinary income, so sheltering it usually saves more than sheltering stock index funds, whose gains get lower long-term rates.
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Frequently asked questions
Are bonds safer than stocks?
High-quality bonds are generally much less volatile than stocks, but they can still lose value, especially long-term bonds when interest rates rise.
What’s the difference between a bond and a bond fund?
An individual bond returns your principal at maturity if the issuer doesn’t default. A bond fund holds many bonds and never matures, so its price keeps moving with rates. Over time, though, it reinvests at new, higher yields when rates rise.
Are bonds a good investment now?
With Treasury yields between roughly 4% and 5% this fall, bonds offer more income than they did a few years ago. Choose maturities that match when you’ll need the money, and remember that longer bonds swing more in price.
How are bond interest payments taxed?
Most bond interest is taxed as ordinary income. Treasury interest is exempt from state and local tax, and many municipal bonds are exempt from federal tax.
Should I buy I bonds or TIPS?
I bonds are simpler, can’t lose value and let you defer tax, but they’re limited to $10,000 a year and locked up for at least 12 months. TIPS have no purchase cap and trade daily, but their prices can fall before maturity.
Related: Stock market basics · 401(k) vs. Roth IRA · Savings calculator
Sources: Federal Reserve FOMC statement (Oct. 28, 2026); U.S. Treasury 6-month bill auction results (Oct. 30, 2026); 10-year Treasury yield reported by CNBC/The Mortgage Reports (Oct. 16, 2026); TreasuryDirect I bond rates for November 2026–April 2027. Bond prices calculated by FinInfoBlog using semiannual coupons. Investing involves risk. This article is for educational purposes and isn’t financial, tax or investment advice.
Written by Chanchala
Founder & Lead Writer · B.Sc. Mathematics (Honors) · 9 years in banking & lending
Chanchala is the founder and lead writer of FinInfoBlog. She holds a B.Sc. in Mathematics (Honors) and has 9 years of experience in banking and lending. She writes plain-English guides on savings, CDs, loans, credit and personal finance for U.S. readers, and makes sure every example shows the math behind the money decision. How we research and fact-check.