Free for 90 days: Sign up now and get 90 days managed free after your first deposit. See offer details

<title>Dismiss</title>
Investing Basics

What Are Bonds?

Bonds are a way for investors to loan money to governments, corporations, and other types of institutions. In exchange for borrowing money, the issuer of the bond agrees to pay the bond holder interest at a specified rate and repay the debt at a designated date in the future.

Articles by Eli Broverman

By Eli Broverman
President and Co-Founder, Betterment  |  Published: June 29, 2010

Bonds are typically lower risk than stocks because their interest rate establishes ahead of time what the investment is expected to return.  Because bonds carry less risk their returns tend to be lower than average returns for stocks. However, investors must factor in the possibility that the borrowed money won’t be repaid, and the risks and returns of bonds will certainly vary depending on the likelihood of default.

High Risk Bonds

For instance Treasuries, which are bonds issued by the U.S. Government, are particularly safe because it’s hard to imagine the U.S. Government won’t make due on its obligation (Treasuries are the type of bonds Betterment accounts are invested in). Due to the high certainty of repayment, returns for Treasuries are moderate .

On the other hand, if a company with a weak financial position issues a bond there will be serious questions about repayment and as a result the company will offer a high interest rate to entice lenders.  Especially risky and high yielding bonds are often called junk bonds.

The risks and returns of a bond depend not just on the credit worthiness of the issuer but also on the duration; bonds that have a long duration until repayment are higher risk and higher reward.

Recommended Content

View All Resources
How’d the Market Do? That’s Harder To Answer Than You Think

How’d the Market Do? That’s Harder To Answer Than You Think

In taxable investing, your after-tax return—the amount you “take home”—is what’s important. Yet far too many investors focus on market performance. Let’s look at the difference.

Take on More Control with Flexible Portfolios

Take on More Control with Flexible Portfolios

You may be an experienced investor who enjoys Betterment but would like to change aspects of our recommended portfolios. Enter Flexible Portfolios.

Redesigning How You Manage Your Finances at Betterment

Redesigning How You Manage Your Finances at Betterment

Our new design represents a synthesis of a large body of customer feedback. We hope it meets your expectations.

How would you like to get started?

Your first step toward a smarter investing future starts here.

Create a Betterment account

Go ahead and join the smart, modern way to invest.

See what we can do for you

Tell us a bit about yourself, and we'll show you the benefits of investing with us.

Get a free investing checkup

Help us get a sense of your investing approach and see how you could improve.

Transfer a 401(k) or an IRA

Move an existing retirement account into a Betterment IRA.

Download the mobile app

Enjoy the Betterment experience anywhere on the go.

<title>Close</title>

Search our site

For more information and disclosures about the Betterment Resource Center, click here. | See our contributors.