Stocks get most of the attention, but bonds play an important role in many portfolios. A bond is essentially a loan you make to a government or company. In return, you receive interest payments and get your money back when the bond matures.
How bonds work
- Face value: the amount repaid at maturity, such as $1,000.
- Coupon: the interest rate paid, often twice a year.
- Maturity: when the loan is repaid, from months to 30 years or more.
- Yield: your effective return based on the price you pay.
Why bond prices move
When interest rates rise, existing bonds with lower coupons become less attractive, so their prices fall. When rates fall, existing bonds become more valuable. Longer-term bonds move more when rates change. If you hold an individual bond to maturity and the issuer does not default, you receive the face value regardless of price swings.
Types of bonds
| Type | Issuer | Risk level |
|---|---|---|
| Government bonds | National governments, such as US Treasuries, UK gilts, Canadian bonds, FGN bonds | Generally lowest in their home currency |
| Municipal or local bonds | States, cities or provinces | Low to moderate |
| Corporate bonds | Companies | Varies with credit rating |
| High-yield bonds | Lower-rated companies | Higher risk, higher interest |
| Inflation-linked bonds | Governments | Protect against inflation |
Why bonds belong in a portfolio
- Stability: high-quality bonds usually fall less than stocks in downturns.
- Income: regular interest payments.
- Diversification: bonds often behave differently from stocks.
- Capital preservation: useful for goals a few years away.
Individual bonds vs bond funds
Buying individual bonds lets you hold to maturity, but requires larger amounts and more research. Bond funds and ETFs offer diversification across many bonds with small amounts, but they have no single maturity date, so their prices fluctuate with rates. Most beginners use a broad bond fund or a target-date fund that includes bonds.
How much should you hold in bonds?
Young investors with long time horizons often hold a small share in bonds, gradually increasing as goals approach. Your mix depends on your goals and comfort with risk; read our guide to asset allocation. See how a balanced portfolio could grow with our Compound Interest Calculator.
Risks of bonds
- Interest rate risk: prices fall when rates rise.
- Credit risk: the issuer may fail to pay.
- Inflation risk: fixed payments lose purchasing power.
- Currency risk: foreign bonds can be affected by exchange rates.
Bonds in Nigeria
Nigerian investors can buy FGN bonds and FGN savings bonds, which are backed by the Federal Government, as well as corporate bonds listed on the NGX or FMDQ. Savings bonds have lower minimums and quarterly interest, making them accessible to beginners. Compare yields with inflation and with treasury bills.
How bonds behave when interest rates change
A simple example shows why bonds move in price. Suppose you own a bond paying 4% interest:
- If new bonds pay 5%, buyers will only buy yours at a lower price, so its value falls.
- If new bonds pay 3%, your 4% bond becomes more attractive, so its value rises.
- If you hold it to maturity, you still receive the full face value, assuming no default.
This is why short-term bonds are less sensitive to rate changes than long-term ones. Many beginners use a mix of short and intermediate bond funds to balance income and stability.
For official, up-to-date guidance, see Investor.gov’s guide to bonds.
Frequently asked questions
Can you lose money on bonds?
Yes. Prices can fall when interest rates rise, and issuers can default. Holding high-quality bonds to maturity reduces the risk.
Are bonds better than savings accounts?
They can offer higher yields but come with price swings and less flexibility.
Do bonds pay monthly?
Most individual bonds pay twice a year, but many bond funds pay monthly distributions.
Bonds: key takeaways
- Bonds are loans that pay regular interest.
- Prices move opposite to interest rates.
- They add stability and income to a portfolio.
- Bond funds offer easy diversification for beginners.
Last reviewed: October 2026. This article is general education, not personal financial, tax or legal advice. Rules, rates and limits change, so check official sources or speak to a qualified professional before making decisions. See our Financial Disclaimer.