™Stock Market University · Bonds, Rates & Credit
Bonds Explained
Understand the trade-offs.
Understand how lending, coupon payments, maturity, credit risk and market yields fit together.
The idea to understand
Relate coupon, maturity, credit quality and market yield to a bond’s cash flows and changing market price.
The explanation
The essentials, explained.
Follow the idea, then work through an example. Pause at the self-check whenever you are ready.
A bond is a loan
When you buy a bond, you are generally lending money to a government, company or other issuer. In return, the issuer promises payments under stated terms, subject to its ability to pay.
Coupon and maturity
The coupon determines scheduled interest, while maturity is when principal is due. A bond can still trade above or below face value before maturity.
Why bond prices move
When prevailing yields rise, older bonds with lower payments usually become less attractive and their prices tend to fall. Credit conditions and liquidity also matter.
Read the full risk
Review credit quality, duration, call provisions, inflation exposure, taxes and trading costs. A bond may be less volatile than a stock without being risk-free.
Optional context & practice
Why this matters
Promised coupons and principal differ from realized return. Purchase price, credit, reinvestment and early sale can change the outcome.
Useful vocabulary
Bond: A debt security representing money lent to an issuer under stated terms. Coupon rate: The annual interest stated on a bond as a percentage of its face value. Yield to maturity: The discount rate that equates a bond’s price with its scheduled coupon and principal payments. Realizing that compounded return requires the relevant payment and reinvestment assumptions; it is not guaranteed.
Coupon, yield and duration are different quantities
Coupon determines contractual interest; current yield relates annual coupon to price; yield to maturity solves for the discount rate equating scheduled cash flows with price. Realized return also depends on payment, reinvestment and the exit date. Modified duration estimates local price sensitivity, while convexity and embedded options can alter larger moves. Clean price usually excludes accrued interest; settlement consideration can include it.
Try it with a hypothetical example
Read a bond offering document for coupon, maturity, call rights and credit terms. Distinguish those contractual terms from a dated market yield quote.
A question to think through
A bond pays $50 annually and costs $900. Is its 5.56% current yield automatically its yield to maturity?
Compare your reasoning
No. Yield to maturity also incorporates scheduled principal repayment and time to maturity. A callable bond may require yield-to-call or yield-to-worst analysis.
A moment to reflect · optional
Why do existing fixed-rate bond prices generally fall when market yields rise?
Think through your answer, then compare it with the explanation.
Reveal the explanation
Their fixed payments become less attractive relative to newly issued bonds offering higher yields.
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Sources & editorial notes
Reviewed 2026-10-13 · My Market Book editorial team. Examples are hypothetical unless identified as historical. General education, not a personal investment recommendation. Next scheduled review: 2027-04-11, or earlier after a material change. Conceptual and evergreen.