bond
A loan to a government or company that pays interest and returns the amount lent at a set date.
A bond is a loan you make to a government or a company. In return the borrower pays you interest, called the coupon, usually once or twice a year, and pays back the amount you lent, the face value, on a set date called maturity. Most long-term investors hold bonds through a bond fund rather than one by one.
Bonds are often called the safe part of a portfolio, and that is only partly true. If you hold a bond to maturity and the borrower pays, you get exactly what was promised. Along the way, though, a bond's price moves with interest rates: when new bonds pay more, existing ones lose value. Long bonds move far more than short ones, and inflation can eat the fixed payments.
In a portfolio, bonds usually do two jobs: they swing much less than stocks, and in many stock crashes they hold up or even rise. Many, not all: there are years when stocks and bonds fall together, which is why the bond part should be chosen by its job, short and in the spending currency for money needed soon.
Example
Grace explains it to the Zapas team with a $1,000 bond paying 4% a year: it pays $40 every year and returns $1,000 at maturity. On the synthetic Tessaro history, long bonds earn 1.8% a year after inflation and short bonds 1.4%, far less than stocks but with much smaller swings.
The two key years point in opposite directions. In the crash (years 21–22) world stocks fall 45.4% while Tessaro Long Bonds gain 26.5%. In year 36, with inflation at 9.1%, stocks lose 18.0% and long bonds lose 16.0% in the same year, while short bonds still gain 6.5%.
Common mistakes
- Calling bonds riskless: long bond prices can fall sharply when rates rise.
- Assuming bonds always rise when stocks fall; some years both fall together.
- Forgetting that inflation eats the fixed coupon, so a nominal gain can be a real loss.
- Holding long bonds for money needed in a year or two, when a short bond would do the job.
Learn it in the course
- Bonds: yield, rate risk and the year both fell · What a bond is, why its price moves with interest rates, short vs long bonds, and a year when stocks and bonds fell together.
- Stocks vs bonds: risk capacity, tolerance and the job you have · How different stock and bond mixes behaved, and how horizon, income and nerves decide the mix.
- Case: pick the fund line-up from six factsheets · Choose three funds for the app from six factsheets, comparing them all-in rather than by headline fee.
- Capstone: the launch memo and your own one-page plan · Write the launch memo for the app and your own one-page investment plan, including how to draw money down later.
- A range, not a number: twenty-five years of possible paths · Where long-run returns come from, and how to read twenty-five years of simulated paths as a range with a median, a 10th and a 90th percentile.