No. While government bonds, particularly U.S. Treasury securities, are considered very low risk due to government backing, all bonds carry some risk, including interest rate risk, the chance that rising rates reduce a bond’s market value before maturity, and for corporate and some municipal bonds, credit risk, the chance the issuer fails to make payments.

What’s the difference between a bond and a bond fund?

A bond is a single debt security from one specific issuer. A bond fund pools money from many investors to buy a diversified collection of bonds, which spreads out credit risk across many issuers but doesn’t eliminate interest rate risk, and unlike an individual bond held to maturity, a bond fund doesn’t have a fixed maturity date guaranteeing the principal back at a specific time.

Can I lose money in a bond investment?

Yes, particularly when selling a bond before maturity after interest rates have risen, or if the issuer defaults and fails to make payments. Holding an individual bond to maturity, assuming the issuer doesn’t default, generally provides protection from interest rate-related losses, since the face value is guaranteed at that point regardless of how the market price fluctuated in the meantime.

How do bond ratings actually work, and why do they matter?

Independent rating agencies assess the creditworthiness of a bond issuer and assign a letter grade reflecting the likelihood that the issuer will make timely payments. Bonds rated in the higher grades are generally considered investment grade, reflecting lower default risk, while those rated below a certain threshold are considered speculative, sometimes called high-yield or junk bonds, reflecting a meaningfully higher chance of default in exchange for a higher stated interest rate. Checking a bond’s rating before purchasing provides an independent, third-party assessment of its relative risk, though ratings can change over time and aren’t a guarantee of future performance.

Back to Glossary

Bond: lending your money for a predictable return

Key takeaways
- A bond is a debt security: buying one means lending money to a government, municipality, or corporation in exchange for regular interest.
- Government bonds are typically considered among the safest available; corporate bonds generally pay more to compensate for higher risk.
- Bond prices move inversely to interest rates, though holding a bond to maturity avoids this fluctuation entirely.
- A bond issued in a foreign currency carries currency risk on top of its own credit and interest rate risk.
- Checking an issuer’s credit rating gives an independent read on a bond’s relative risk before purchasing.

A bond is a debt security, similar to an IOU, bought when lending money to a government, municipality, or corporation. Here’s how bonds work and what role they can play in a cross-border portfolio.

What is a bond?

According to Investor.gov⁠(opens in new window), a bond is a debt security, similar to an IOU, bought when lending money to a government, municipality, or corporation. In return, the issuer promises to pay a specified rate of interest during the life of the bond and to repay the principal, also called the face value, when the bond matures.

How bonds work

Buying a bond isn’t purchasing ownership in the issuer the way buying a stock would be; it’s lending money, and the issuer is legally obligated to pay interest and eventually return the principal, regardless of how profitable the issuer becomes. Bonds typically pay interest on a regular schedule, often every six months, which is part of why they’re commonly described as providing a predictable income stream compared to the more variable returns of stock ownership.

Bonds are generally classified by their issuer and their maturity. Government bonds, including U.S. Treasury securities, are typically considered among the safest available, since they’re backed by the issuing government’s ability to tax and print currency. Municipal bonds are issued by state or local governments and often carry a tax advantage, since the interest is frequently exempt from federal income tax and sometimes state tax as well. Corporate bonds are issued by companies and generally offer a higher interest rate than government bonds, reflecting the somewhat higher risk that a company could fail to make payments. Maturities range from short-term, typically under three years, to long-term, sometimes exceeding ten or even thirty years, with longer maturities usually paying a higher rate to compensate investors for the extended commitment.

The relationship between interest rates and bond prices

One of the more counterintuitive aspects of bonds is how their market price moves in relation to prevailing interest rates. When interest rates rise after a bond has been purchased, newly issued bonds paying a higher rate become more attractive, making the existing, lower-rate bond less valuable if sold before maturity, so its market price falls. When interest rates fall, the opposite happens, and the existing bond, now paying a comparatively higher rate than newer issues, becomes more valuable and can be sold at a premium above its face value. Holding a bond to maturity rather than selling it early means this price fluctuation doesn’t matter directly, since the full face value is received regardless, but it matters considerably when a sale before maturity might be needed.

Bonds and international money transfers

For immigrants managing savings across more than one country, understanding bonds as a tool for preserving capital while earning a predictable return is relevant both domestically and, depending on the specific situation, for assets held abroad. Government bonds issued in a family member’s home country can function similarly to U.S. Treasury bonds in terms of relative safety within that specific country’s own financial system, though the comparison isn’t perfect, since sovereign risk and currency stability vary considerably between countries.

Reviewing how to cash in a savings bond⁠(opens in new window) is a useful practical starting point for anyone holding U.S. savings bonds specifically and trying to understand the redemption process.

Currency risk note

A bond issued in a foreign currency carries a layer of risk beyond the bond’s own credit and interest rate risk: the risk that the foreign currency weakens against a home currency before the bond’s interest payments or principal are converted back. Even a bond paying a stable, reliable interest rate in its own currency can produce a disappointing return once converted, if that currency has depreciated meaningfully during the holding period. This is a factual feature of holding any foreign-currency fixed income investment, not a flaw in the bond itself, and it’s worth factoring in specifically when comparing a foreign bond’s stated interest rate against a domestic alternative.

How to think about bonds within a broader portfolio

Understand the relevant time horizon. Bonds are often used to preserve capital and generate income for a nearer-term goal, while stocks are more commonly used for longer-term growth, though the right mix depends on specific circumstances.
Check the issuer’s credit quality. Bond rating agencies assess how likely an issuer is to make timely payments, and a lower-rated bond typically offers a higher interest rate specifically to compensate for that added risk.
Consider the maturity length relative to specific needs. A bond maturing sooner exposes an investor to less interest rate risk than one with a much longer maturity, since there’s less time for rates to move unfavorably before repayment.
Factor in currency exposure for any foreign bond. As covered above, this is a separate risk layer worth understanding clearly before comparing a foreign bond’s return against a domestic one.

Common questions about bonds

Are bonds risk-free?

No. While government bonds, particularly U.S. Treasury securities, are considered very low risk due to government backing, all bonds carry some risk, including interest rate risk, the chance that rising rates reduce a bond’s market value before maturity, and for corporate and some municipal bonds, credit risk, the chance the issuer fails to make payments.
What’s the difference between a bond and a bond fund?

A bond is a single debt security from one specific issuer. A bond fund pools money from many investors to buy a diversified collection of bonds, which spreads out credit risk across many issuers but doesn’t eliminate interest rate risk, and unlike an individual bond held to maturity, a bond fund doesn’t have a fixed maturity date guaranteeing the principal back at a specific time.
Can I lose money in a bond investment?

Yes, particularly when selling a bond before maturity after interest rates have risen, or if the issuer defaults and fails to make payments. Holding an individual bond to maturity, assuming the issuer doesn’t default, generally provides protection from interest rate-related losses, since the face value is guaranteed at that point regardless of how the market price fluctuated in the meantime.
How do bond ratings actually work, and why do they matter?

Independent rating agencies assess the creditworthiness of a bond issuer and assign a letter grade reflecting the likelihood that the issuer will make timely payments. Bonds rated in the higher grades are generally considered investment grade, reflecting lower default risk, while those rated below a certain threshold are considered speculative, sometimes called high-yield or junk bonds, reflecting a meaningfully higher chance of default in exchange for a higher stated interest rate. Checking a bond’s rating before purchasing provides an independent, third-party assessment of its relative risk, though ratings can change over time and aren’t a guarantee of future performance.

In Summary

A bond offers a relatively predictable way to earn income by lending money to a government or company, with government bonds generally considered among the safer options available to everyday investors. For anyone holding or considering a bond denominated in a foreign currency, understanding the added layer of currency risk on top of the bond’s own credit and interest rate risk gives a fuller, more accurate picture of what to expect.

This publication is provided for general information purposes only and is not intended to cover all aspects of the topics discussed herein. This publication is not a substitute for seeking advice from an applicable specialist or professional. The content in this publication does not constitute legal, tax, or other professional advice from Remitly or any of its affiliates and should not be relied upon as such. While we strive to keep our posts up to date and accurate, we cannot represent, warrant, or otherwise guarantee that the content is accurate, complete, or up to date.