What is Bond? (Plain English Definition)

A bond is essentially a loan that you make to a borrower -- typically a government, municipality, or corporation. In return for your money, the borrower promises to pay you regular interest (called the coupon) and return your original investment (the principal or face value) on a specific date (the maturity date).

Bonds are generally considered less risky than stocks because they provide predictable income and have a higher claim on assets if the issuer goes bankrupt. However, they typically offer lower long-term returns. U.S. Treasury bonds are considered among the safest investments in the world because they are backed by the full faith and credit of the U.S. government. Corporate bonds offer higher yields but carry more risk.

Bond ETFs hold hundreds or thousands of individual bonds in a single fund, providing instant diversification. This is especially valuable because individual bonds can be difficult and expensive for regular investors to buy. Bond ETFs trade on exchanges like stock ETFs and typically pay monthly income distributions, making them a convenient way to add fixed-income exposure to your portfolio.