Bonds

"A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental)." Source: Investopedia.com

Understanding BondsInvestopedia

When governments or businesses take on debt they sell bonds that pay interest.

T-Bills or Treasury Bills are short-term government debt. They have maturity dates that range from three months to two years or so. Notes are for medium duration debt. A ten year government bond is called a Note. Thirty year government debt securities are called Bonds. T-Bills, Notes, and Bonds: the word they chose to use tells you the duration of the debt.

Side Note: Corporations only issue corporate bonds, not Notes or Treasuries.

States, cities and municipalities also offer bonds called Municipal Bonds or Munis (Myu-Nees).

Bond funds are collections of bonds sold to investors in investment vehicles like Exchange Traded Funds (ETFs).

Normally the longer the duration, the better the coupon (interest earned over the life of the bond, also known as “yield”). A ten year Note will usually pay more yield than a 6 month T-Bill to compensate the investor for the added risk of holding on to the debt as an investment for a longer period of time.

The yield curve is a relative relationship between shorter and longer term bonds. When times get tough, the short term bonds pay more than the longer term bonds. This is called a yield curve inversion and this is considered a reliable leading indicator of an impending recession.

If the Federal Reserve raises interest rates, the bond you bought with a certain yield will fall in value relative to the new ones you can now buy because the Fed Funds Rate went higher. If interest rates fall, bonds that were purchased at times of higher interest rates increase in price.

The Fed raising rates causes previously issued bond values to fall. The Fed lowering rates causes previously issued bond values to rise.