Bonds, Explained for People Who Never Paid Attention to Bonds

What a bond is

A bond is a loan. When you buy a bond, you're lending money to someone, a government, a city, or a company. In return, they promise to:

1. Pay you interest on a set schedule, usually twice a year.
2. Pay back the original amount, called the face value or principal, on a set date, called the maturity date.

Let's say you buy a $1,000 bond that pays 5% a year and matures in 10 years. You'd typically receive $50 a year in interest, often as two $25 payments, and get your $1,000 back at the end of the 10 years, assuming the borrower pays as promised.

That's it. Everything else about bonds builds on that simple structure.

The main types of bonds

U.S. Treasuries

Loans to the federal government. They're backed by the full faith and credit of the United States and are considered among the safest investments in the world. Interest is subject to federal income tax but generally exempt from state and local income tax.

• Treasury bills last a year or less.
• Treasury notes last from two to ten years.
• Treasury bonds last 20 or 30 years.
• TIPS, or Treasury Inflation-Protected Securities, adjust their principal with inflation.

Municipal bonds

Loans to states, cities, counties, school districts, and other local governments. Interest on many municipal bonds is exempt from federal income tax. Since Florida has no state income tax, Florida residents don't get an extra state tax break the way residents of high-tax states might, but the federal exemption can still matter, especially in higher tax brackets.

Corporate bonds

Loans to companies. They usually pay more than Treasuries because there's more risk that a company can't pay. Corporate bonds are rated by credit rating agencies:

• Investment-grade bonds come from companies considered relatively likely to pay.
• High-yield, sometimes called junk, bonds come from companies with a higher risk of default, and pay more to compensate.

Agency and mortgage-backed bonds

Bonds issued by government-sponsored entities, and bonds backed by pools of mortgages. Many broad bond funds hold these alongside Treasuries and corporate bonds.

Yield: what you actually earn

The coupon rate is the interest rate printed on the bond. The yield is what you actually earn based on the price you pay.

If you buy a bond at exactly its face value and hold it to maturity, your yield equals the coupon rate. But bonds trade between investors every day, and their prices change. If you buy a bond for less than face value, your yield is higher than the coupon. If you pay more, your yield is lower.

When people talk about bond yields in the news, like "the 10-year Treasury yield hit 5.1%," they're talking about the return a buyer would earn today if they held the bond to maturity.

Here's where Treasury yields stood on September 23, 2026:

Why bond prices move: the seesaw

This is the single most important thing to understand about bonds.

When interest rates rise, the prices of existing bonds fall. When interest rates fall, the prices of existing bonds rise.

Think about why. Let's say you own a bond paying 4%. Then interest rates rise, and new bonds start paying 5%. Nobody wants to pay full price for your 4% bond when they can buy a new 5% bond. So if you want to sell yours, you'd have to sell it at a discount, low enough that the buyer's effective return is similar to the new bonds.

Here's what that looks like in numbers. Take a bond paying 4% a year when similar new bonds yield 5%. Its approximate price, per $100 of face value, depends on how long it has left:

The longer the bond, the bigger the price change when rates move. That's why long-term bonds swing more than short-term bonds.

In plain terms: bond prices and interest rates move in opposite directions, and the longer the bond, the bigger the swing.

Duration: how sensitive a bond is

Duration is a measure of how much a bond's price is likely to change when interest rates change. A higher duration means more sensitivity.

A rough rule of thumb: for each 1 percentage point change in interest rates, a bond's price moves by approximately its duration in percentage terms, in the opposite direction. A bond fund with a duration of 6 might fall about 6% if rates rise by 1 percentage point, and rise about 6% if rates fall by 1 point. It's an approximation, but it's a useful way to understand the risk in your bond funds.

You can usually find a bond fund's duration on its fact sheet.

The other risks in bonds

Interest rate risk is the big one, but there are others.

Credit risk

The risk that the borrower doesn't pay. It's very low for U.S. Treasuries and higher for corporate bonds, especially high-yield ones. That's why corporate bonds pay more.

Recently, investors have been charging AI-related tech companies extra to lend to them as those companies borrow heavily to build data centers. Recent data cited by Reuters showed AI-related bonds paying about 1.15 percentage points more than Treasuries, compared with about 0.78 points for the broader investment-grade bond market. That extra yield is investors being paid for extra risk.

Inflation risk

If inflation runs higher than your bond's yield, your money loses buying power. With inflation at 3.4% in August 2026, a bond yielding 5% has a real return of roughly 1.6%. A bond yielding 2% would be losing ground.

Reinvestment risk

When a bond matures or you receive interest, you may have to reinvest at lower rates if rates have fallen. That's more of a concern when rates are dropping.

Liquidity risk

Some bonds are harder to sell quickly without accepting a lower price, especially smaller municipal or corporate issues.

Individual bonds vs. bond funds

This is where a lot of the confusion about "losing money in bonds" comes from.

Individual bonds

When you own an individual bond and hold it to maturity, you get your full face value back at the end, as long as the borrower pays. Price changes along the way only matter if you sell before maturity.

So if you bought a 10-year Treasury and interest rates rose, the market price of your bond might drop. But if you hold it for the full 10 years, you'll still get your $1,000 back plus all the interest you were promised.

Bond funds

A bond fund holds many bonds and doesn't have a single maturity date. It's constantly buying new bonds and selling or rolling over old ones. So when rates rise, the fund's price falls, and there's no maturity date when you're guaranteed to get back what you paid.

That's why bond funds can show losses that feel permanent. But there's another side: as the fund replaces older, lower-yielding bonds with new ones at higher rates, the income it pays tends to rise over time. And if you're continuing to add money, you're buying at higher yields.

2022 was a painful reminder of this. As the Federal Reserve raised rates quickly, bond funds had one of their worst years in decades. Many investors learned for the first time that bond funds can lose value.

Which is better?

Neither is universally better.

• Bond funds offer diversification across many bonds, professional management, easy buying and selling, and small minimum investments. They're what most workplace plans offer.
• Individual bonds offer a known maturity date and a predictable return if held to maturity. They can work well for people who need specific amounts of money at specific times.

Bond ladders

A bond ladder is a way of owning individual bonds, or CDs, that mature at different times.

Let's say you want steady access to money over the next five years. You might buy bonds or CDs maturing in one year, two years, three years, four years, and five years. Each year, one "rung" matures. You can use that money, or reinvest it at the far end of the ladder.

Ladders do a few useful things:

• They provide cash on a predictable schedule.
• They reduce the risk of locking all your money in at one interest rate.
• If you hold each bond to maturity, price swings along the way matter less.

For retirees who need a reliable stream of money, a ladder can be a way to match investments to spending needs. Some people build a ladder to cover the first several years of retirement spending, or to bridge the years between retirement and Social Security.

Why bonds are in your portfolio at all

It's worth stepping back and asking why people own bonds in the first place.

Stability. High-quality bonds usually swing much less than stocks. They're the steadier part of a portfolio.

Income. Bonds pay regular interest, which can help cover spending in retirement.

Diversification. Historically, high-quality bonds, especially Treasuries, have often held up or risen when stocks fall sharply, though not always. In 2022, both stocks and bonds fell together, which was unusual and painful.

A source of cash in a downturn. When stocks fall, having bonds to draw from means you don't have to sell stocks at a low point to cover your spending.

Bonds at different stages of life

How much of a portfolio belongs in bonds, and what kind, usually changes over time.

Early career. When retirement is decades away, many people hold relatively little in bonds, because they have time to ride out stock market swings. The bonds they do hold are often inside a target-date fund.

Mid-career. As balances grow and retirement gets closer, many people gradually add more bonds for stability. This is also a good time to learn what's actually inside your bond holdings, since they'll matter more later.

Five to ten years before retirement. This is often when bonds start doing their most important job: protecting the money you'll need in the first years of retirement from a badly timed stock market drop. Some people start building a ladder or a dedicated bond reserve during this stretch.

In retirement. Bonds can provide income and a source of cash to draw from when stocks are down. How much makes sense depends on your spending, your guaranteed income from a pension or Social Security, and how much volatility you can live with.

For FRS Pension Plan members, the pension itself provides a stable, bond-like income base, which may mean less need for bonds elsewhere than someone who relies entirely on savings. For Investment Plan members and people with large 457 or IRA balances, bonds often play a bigger role in providing stability.

There's no single right mix for everyone. The right amount depends on your timeline, your other income, and your comfort with risk.

What today's higher yields mean

After years of very low rates, bonds look different today.

Better income for savers and retirees. Safe bonds and Treasuries are paying more than they have in years. For retirees who want reliable income, that's meaningful.

Short-term pain for existing bond holders. If you owned bond funds as rates rose, you saw price declines. That's the seesaw at work.

Higher future returns. Over time, a bond portfolio's return tends to track its starting yield. Higher yields today generally mean better expected income going forward than the near-zero yields of the 2010s, though prices will keep moving with rates.

A real alternative to stocks. When safe bonds pay around 5%, some investors decide they don't need to take as much stock market risk to reach their goals.

A note for public employees and retirees

If you're an FRS Pension Plan member, your pension works a bit like a very large bond. It provides steady, predictable income that doesn't depend on the market. That can change how much you need in bonds elsewhere, since your pension already provides a stable base.

If you're in the FRS Investment Plan or rely on a 457 or other savings, bonds likely play a bigger role in providing stability, especially as you get closer to retirement.

If you're retired and drawing from savings, holding enough in high-quality bonds and cash to cover several years of spending can help you avoid selling stocks during a downturn. How much depends on your spending, your other income, and your comfort with risk.

What I'm not going to do

I'm not going to tell you where interest rates are headed, or whether now is the time to buy bonds. Nobody knows where rates go next, and people have been confidently wrong about it for decades.

I'm also not going to recommend specific bonds or funds here.

What I will say is this. When it comes down to it, bonds aren't exciting, and that's the point. Understanding how they work, and what job they're doing in your plan, is what keeps a scary headline about bond prices from turning into a bad decision.

Let's look at the bond side of your plan

A lot of people have never looked closely at the bonds they own. They're sitting inside a target-date fund, a 457 option, or a balanced fund, doing a job nobody explained.

I can help you see what you actually have. We'll look at the bonds inside your accounts, how sensitive they are to interest rate changes, how they fit with your pension or other income, and whether the bond side of your plan is set up to do its job: providing stability and income when you need it.

I work as a fiduciary, which means I'm required to act in your best interest. No products to sell.

You don't need to predict interest rates. You need bonds that fit your plan.

Frequently asked questions

What is a bond?

A bond is a loan to a government, municipality, or company. The borrower pays you interest on a schedule and repays the face value at maturity, assuming it doesn't default.

Why do bond prices fall when interest rates rise?

When rates rise, new bonds pay more, so existing bonds with lower interest become less attractive and their prices fall until their effective yield matches the market.

Can you lose money in bonds?

Yes. Bond prices can fall when interest rates rise, and borrowers can default. If you hold an individual bond to maturity and the issuer pays, you receive the face value back. Bond funds don't have a maturity date, so their value can stay lower for a time.

What is bond duration?

Duration measures how sensitive a bond's price is to interest rate changes. As a rough rule, a bond or fund's price moves about its duration in percentage terms for each 1 percentage point change in rates, in the opposite direction.

What is a bond ladder?

A bond ladder is a set of bonds or CDs maturing at different times, providing cash on a schedule and reducing the risk of locking everything in at a single interest rate.

Are Treasury bonds taxable in Florida?

Treasury interest is subject to federal income tax but exempt from state and local income tax. Florida has no state income tax, so the state exemption doesn't provide an additional benefit to Florida residents.

Educational content only. Not individualized investment, tax, or legal advice. Examples are hypothetical and for illustration only. Past performance does not guarantee future results. Benowitz Wealth Management is a brand of Joy Financial Group LLC, a Florida state-registered investment adviser.

Neither Joy Financial Group LLC nor Benowitz Wealth Management is affiliated with, endorsed by, or employed by the Florida Retirement System, the Florida Division of Retirement, the State Board of Administration of Florida, MyFRS, or any government agency. FRS members may obtain free, unbiased guidance from the MyFRS Financial Guidance Line at 1-866-446-9377.