Ways to trade and invest · Guide 4 of 11

What Are Bonds? A Beginner’s Guide to Bond Investing

Last reviewed 2 November 2026Beginner friendlyCovers the UK, US, EU, Australia and Canada

The short version

A bond is a loan. You lend money to a government or a company for a set number of years, and in return they pay you interest, usually once or twice a year, then give your money back at the end. Bonds tend to rise and fall less than shares, which is why many people hold some to make their investments steadier.

You get: A loan to a government or company that pays interest
Typical costs: Dealing fees and spreads; fund charges if you use a bond fund
Can you lose more than you put in?: No
Risk: Lower

Governments borrow by selling bonds: gilts in the UK, Treasuries in the US, and others across Europe, Australia and Canada.
Companies sell corporate bonds. They usually pay more interest than government bonds because there’s more chance the company can’t pay you back.
If you hold a bond to the end and the borrower doesn’t fail, you get back exactly what was promised.
If you sell before the end, the price can be higher or lower than you paid. Bond prices fall when interest rates rise.
Most beginners own bonds through a bond fund or ETF rather than buying single bonds.

How a bond works

Every bond has three main numbers. The face value is the amount the borrower will repay at the end, often £100 or $1,000 per bond. The coupon is the yearly interest, shown as a percentage of the face value. The maturity date is when the loan ends and you get the face value back.

Bonds can also be bought and sold before they mature, on markets much like the stock market. That’s where prices start to move.

Why bond prices move

Suppose you own that 4% bond, and a year later interest rates have risen, so new bonds of the same type pay 5%. Nobody will pay you the full £1,000 for a bond paying 4% when they can get 5% elsewhere. To sell, you’d have to accept a lower price. For a bond with about 10 years left, the price would drop to roughly £923. If rates had fallen to 3% instead, your 4% bond would be more attractive and its price would rise to about £1,085¹.

That’s the most important idea in bonds: when interest rates rise, existing bond prices fall, and when rates fall, prices rise. The longer the time until a bond matures, the bigger the swing. A 2-year bond in the same situation would only drop to about £981.

This is why “safe” bonds can still lose money. In 2022, when interest rates rose quickly, many long-dated government bond funds fell by more than shares did.

You’ll see the word yield a lot. It means the return you’d get from buying the bond at today’s price and holding it to maturity, including the coupons. When a bond’s price falls, its yield rises, and the other way round.

What it costs

Dealing fees and spreads when you buy or sell individual bonds through a broker. Spreads on smaller corporate bonds can be wide.
Fund charges if you use a bond fund or ETF, often 0.05% to 0.5% a year for index-tracking bond funds.
Buying direct from the government: some governments let you buy their bonds directly at little or no cost, such as TreasuryDirect in the US.

The risks

Interest rate risk: prices fall when rates rise, as explained above.
Credit risk: the borrower might not pay. Agencies such as S&P, Moody’s and Fitch give bonds credit ratings. Bonds rated BBB or above are called investment grade. Lower-rated high-yield (or “junk”) bonds pay more because more of them default.
Inflation risk: if prices in the shops rise faster than your coupon, your money buys less when it comes back. Some governments sell inflation-linked bonds to protect against this.
Selling early: if you need the money before maturity, you get the market price, which might be below what you paid.

Rules where you live

Products, protections and tax rules differ from country to country. Here’s a summary for the main English-speaking markets. Always check your own regulator for the latest position.

UK: Gilts are free of Capital Gains Tax, though the interest is taxable². Bonds and bond funds can be held in an ISA or SIPP. Gilts can be bought through most investment platforms.
US: Interest on US Treasury bonds is exempt from state and local income tax but not federal tax. Interest on many municipal bonds (issued by states and cities) is free of federal tax. Treasuries and savings bonds can be bought directly through TreasuryDirect.
EU: Governments issue their own bonds, such as German Bunds and French OATs. Retail access and tax treatment vary by country, so many EU investors use UCITS bond ETFs.
Australia: Australian government bonds can be bought on the ASX as exchange-traded bonds, along with some corporate bonds. Interest is taxed as income.
Canada: Government of Canada and provincial bonds are available through brokers. Many Canadians also use GICs (guaranteed investment certificates), which are bank deposits rather than bonds but play a similar role.

Who it tends to suit

Tends to suit

People who want steadier investments and regular income.
Investors who already own shares and want something that often (not always) holds up better in a stock market fall.
Anyone saving for a known date a few years away, using bonds that mature around then.

Think twice if

People expecting big gains. Over long periods, bonds have usually grown more slowly than shares.
Anyone who assumes bonds can’t fall in price. Long-dated bonds can fall a lot when rates jump.

How to get started safely

Decide whether you want individual bonds (you know exactly what you get at maturity) or a bond fund (simpler, more spread out, but no fixed end date).
Start with government bonds or high-quality bond funds before considering corporate or high-yield bonds.
Match the time to maturity to when you might need the money; shorter bonds swing less in price.
Use a tax-free account if your country has one.
Check the yield and the fund charge, and compare with what you could get on a savings account.

Words in this guide

Bond: A loan to a government or company that pays interest and returns your money at a set date.
Face value: The amount the borrower repays when the bond matures.
Coupon: The yearly interest a bond pays, as a percentage of its face value.
Maturity: The date the bond ends and the face value is repaid.
Yield: Your return if you buy at today’s price and hold to maturity. It rises when the price falls.
Default: When a borrower fails to pay interest or repay the loan.
Credit rating: A grade from an agency showing how likely a borrower is to repay. Investment grade means BBB or higher.
Gilts / Treasuries: Bonds issued by the UK and US governments respectively.

Frequently asked questions

Are bonds safer than stocks?

Usually less volatile, yes, and high-quality government bonds rarely default. But bonds can still fall in price, sometimes sharply when interest rates rise, and inflation can eat into their value.

How much of my money should be in bonds?

There’s no single right answer, and it depends on when you’ll need the money and how you’d cope with falls. A common starting point is a mix such as 60% shares and 40% bonds. People often hold more in bonds as the date they need the money gets closer, because bond prices usually swing less. Ready-made portfolios and target-date funds set this mix for you. A regulated adviser can help if you want it tailored to your situation.

Why do bond prices fall when interest rates rise?

Because new bonds start paying the higher rate, so older bonds paying less become less attractive. Their price falls until their yield matches the market.

Should a beginner buy individual bonds or a bond fund?

A bond fund or ETF is simpler and spreads your money across many bonds. Individual government bonds can make sense if you want a fixed amount back on a known date.

Sources and further reading

Numbers in the guide, like ¹, point to these sources. Rules, fees and tax change, so check the latest version before you act.

Interest rate risk: when interest rates go up, prices of fixed-rate bonds fall. Investor.gov (SEC).
CG54900 – Securities: gilt-edged securities. HMRC Capital Gains Manual.