How to Invest in Bonds: A Complete Guide

How Bonds Work & How to Invest in Them

By Lyle Daly – Updated Aug 17, 2025 at 3:03 PM | Fact-checked by Frank Bass

Key Points

Investors earn by holding bonds till maturity or selling them at a higher price.
Bond funds offer a pooled investment option, typically safer than individual bonds.
Treasury bonds are available directly via TreasuryDirect, bypassing brokers.

A bond is a debt instrument issued by a government or a corporation to raise money. Investors who buy bonds receive a fixed return based on the bond's interest rate.

Most of us are used to borrowing money in some capacity, whether it's mortgaging our homes or bumming a few bucks off a friend. Similarly, companies, municipalities, and the federal government borrow money, and they use bonds to do it.

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Bonds

Bonds are debt securities that entitle the holder to receive interest payments.

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Bond prices normally rise for the following reasons:

The borrower's credit risk profile improves. This indicates they're more likely to repay the bond, so the price would typically rise.
Interest rates on newly issued bonds decrease. The value of older bonds at higher rates will go up.

Yields, or the interest rate a bond pays, and bond prices tend to have an inverse relationship, meaning they move in opposite directions. If interest rates increase, prices for existing bonds are likely to fall because they offer lower rates than newly issued bonds.

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Cons:

Less cash: Bonds require you to lock your money away for extended periods of time.
Interest rate risk: Bonds carry the risk of interest rate changes. Imagine you buy a 10-year bond paying 3% interest. If that same issuer offers bonds at 4% interest a month later, then your bond drops in value. If you hold it, you'll lose out on potential earnings by getting stuck with that lower rate.
Issuer default: This is uncommon, but if an issuer defaults on its obligations, you risk losing out on interest payments, getting your principal repaid, or both.
Transparency: There's less transparency in the bond market than in the stock market, so brokers can sometimes get away with charging higher prices. You might have a harder time determining whether the price you're quoted for a given bond is fair.
Smaller returns: The return on investment you'll get from bonds is substantially less than what you'll get with stocks.

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About the Author

Lyle Daly is a contributing Motley Fool stock market analyst covering information technology and cryptocurrency. Lyle has been a contributor at the financial services company since 2018. His work has been featured on USA Today, Yahoo Finance, MSN, Fox Business, and Nasdaq. Before joining The Motley Fool, he wrote for financial brands including Intuit.

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