Investing in Bonds: Understanding Yield and Duration

Bonds are debt securities issued by governments or companies to raise capital. When you buy a bond, you effectively lend money to the issuer in exchange for regular interest payments, called coupons, and the return of principal when the bond matures. Bonds are generally considered lower-risk investments compared with stocks, but their value can still fluctuate based on interest rates and creditworthiness.

Yield is a key metric in bond investing; it represents the return you earn from a bond relative to its price. When interest rates rise, bond prices typically fall, causing yields to go up, and vice versa. Understanding the relationship between price and yield helps investors evaluate whether a bond offers an attractive return for its level of risk.

Duration measures a bond’s sensitivity to interest rate changes; it approximates how much a bond’s price will move when interest rates change. Bonds with longer maturities or lower coupon rates generally have higher durations and therefore greater interest rate risk. By balancing bonds with different durations, investors can manage their exposure to interest rate movements while aiming for desired returns.