What are bonds and how do they work?

A bond is a loan you make to a government or corporation. The issuer pays you a fixed interest rate (the coupon) over the life of the bond and returns your principal at maturity. U.S. Treasury bonds are backed by the federal government and considered the safest bonds available. Corporate bonds offer higher yields in exchange for higher risk.

What are I bonds and how much can I buy?

Series I savings bonds are U.S. Treasury bonds whose interest rate adjusts with inflation. In 2026, the annual purchase limit is $10,000 per person in electronic I bonds through TreasuryDirect, plus up to $5,000 in paper I bonds purchased with your federal tax refund. I bonds can't be redeemed in the first year and incur a 3-month interest penalty if redeemed in years 1–5.

Should I buy individual bonds or bond ETFs?

Bond ETFs are better for most investors. Individual bonds require more capital for diversification, and selling before maturity means taking market-price risk. Bond ETFs (like BND, AGG, VGIT) offer instant diversification across hundreds of bonds, daily liquidity, low costs, and the ability to buy in any amount. The main advantage of individual bonds is knowing exactly what you'll receive at maturity.

How much of my portfolio should be in bonds?

A common rule of thumb is to hold your age as a percentage in bonds (e.g., 35% bonds at age 35), though many advisors now suggest subtracting your age from 110 or 120. Young investors with long time horizons often hold minimal bonds (0–20%) and shift more toward bonds as they near retirement. Bonds reduce portfolio volatility but also reduce expected long-term returns.

Bond Investing 2026: Treasury Bonds, I Bonds, Corporate Bonds & Bond ETFs

Bonds are loans investors make to governments or corporations in exchange for regular interest payments and return of principal at maturity. Bonds serve a critical role in a diversified portfolio: they reduce volatility, provide income, and tend to hold value (or rise) when stocks fall sharply. For most investors, the question isn’t whether to own bonds — it’s how much, and which type.

Bond Types at a Glance

How Bond Prices Work

Bond prices move inversely to interest rates. When interest rates rise, existing bond prices fall (because new bonds offer higher yields). When rates fall, existing bond prices rise. This is why long-term bonds are more volatile than short-term bonds — a longer duration means more price sensitivity to rate changes.

For investors holding bonds to maturity, price fluctuations don’t matter. You receive your coupon payments and principal back regardless. For investors in bond funds or ETFs, NAV fluctuates daily with interest rate movements.

Written by WealthVieu

WealthVieu researches and writes data-driven personal finance guides using primary sources including the IRS, Bureau of Labor Statistics, Federal Reserve, and Census Bureau.

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