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What are bonds and how do they work?

The Balance / Mary McLain Was this page helpful? Bonds are a type of loan to the government or a corporation that comes with less risk and return than stocks. Learn how bondholders earn interest on these investments.

What are bonds used for?

Bonds are debt instruments and represent loans made to the issuer. Bonds allow individual investors to assume the role of the lender. Governments and corporations commonly use bonds to borrow money to fund roads, schools, dams, or other infrastructure.

How does a government bond work?

Here's an example of how a bond works: Let's say the government issues a 10-year bond with a face value (a.k.a. par value) of $10,000 and an annual interest rate of 4%, paid semiannually. When you buy this bond, you're lending the government $10,000.

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