Most beginner investors learn about stocks before they learn about anything else. Bonds tend to come up later — often framed as something for older people with conservative portfolios, not for someone in their 20s putting money away for the first time.
That’s partly true and partly not. Understanding what bonds are and how they work matters even if you’re years away from holding them, because they’re a core part of how financial markets function and how most investment portfolios are built.
1. What a bond actually is
A bond is a loan. When you buy a bond, you’re lending money to the issuer — a government or a company — in exchange for regular interest payments and the return of your original investment at a specified future date.
The main terms:
- Face value (or par value): the amount you’ll receive back when the bond matures, typically £1,000 or $1,000 per bond
- Coupon rate: the annual interest rate paid on the face value. A 4% coupon on a £1,000 bond pays £40 per year
- Maturity date: when the bond expires and the issuer repays the face value
- Yield: the return you actually earn, which changes based on the price you paid for the bond
The difference between coupon rate and yield is worth understanding. If you buy a bond with a 4% coupon for £1,000 (face value), your yield is 4%. If you buy the same bond for £900 because prices have fallen, your yield is higher than 4% — you’re still receiving £40/year but you paid less for it.
2. Types of bonds
Government bonds
In the UK, government bonds are called gilts. In the US, they’re called Treasuries (or T-bonds, T-notes, T-bills depending on maturity length). Both are backed by the respective government and are considered among the safest investments available, since the risk of the UK or US government defaulting is extremely low.
Gilts and Treasuries are the bedrock of most institutional portfolios and the benchmark against which other investments are measured.
Corporate bonds
Companies also issue bonds to raise money, at higher interest rates than government bonds to compensate for the higher risk of corporate default. Corporate bonds are graded by credit rating agencies — investment-grade bonds are from financially stable companies; high-yield bonds (also called “junk bonds”) offer higher returns but come from companies with weaker credit profiles.
Inflation-linked bonds
In the UK, index-linked gilts pay returns tied to inflation (usually RPI). In the US, Treasury Inflation-Protected Securities (TIPS) work similarly. These are designed to preserve purchasing power over time and tend to appeal to investors concerned about long-term inflation.
3. How bond prices and interest rates relate
This relationship catches a lot of new investors off guard. When interest rates rise, existing bond prices fall. When interest rates fall, existing bond prices rise. They move in opposite directions.
The reason: if you hold a bond paying 3% and new bonds are issued at 4%, your bond paying 3% becomes less attractive. To sell it, you’d need to offer it at a lower price so the yield becomes competitive with new 4% bonds. The yield adjusts through the price.
This is why bond funds lost value in 2022 when central banks raised rates sharply. The underlying bond holdings dropped in price, even though the bonds themselves were perfectly safe if held to maturity.
4. Why bonds matter in a portfolio
Bonds and equities (stocks) have historically moved in different directions during market stress — when stocks fall sharply, bonds often rise or hold steady, and vice versa. This is what makes them useful for diversification.
A portfolio holding only stocks experiences the full volatility of equity markets. Adding bonds reduces that volatility, at the cost of some long-term return. Over long periods, stocks have significantly outperformed bonds — which is why younger investors with long time horizons typically hold higher proportions of stocks.
A commonly cited rule of thumb — “hold your age in bonds” — would suggest a 25-year-old holds 25% bonds and 75% stocks. Many younger investors today treat this as too conservative and hold much lower bond allocations (10–20%, or even zero) given their long horizon.
The case for some bonds even in your 20s: they reduce portfolio volatility, which makes it psychologically easier to stay invested during downturns. An investor who stays the course with a 80/20 stock/bond split often does better than one who panics and sells an all-stock portfolio during a crash.
5. How to actually invest in bonds
For most individual investors, the practical route to bonds is through bond funds or ETFs rather than buying individual bonds.
Bond ETFs and funds
A bond fund holds a diversified portfolio of bonds, pooling investor money across many different issuers and maturities. This gives you diversification within bonds — reducing the risk of any one issuer defaulting — and the ability to invest small amounts.
Popular options include government bond ETFs (tracking gilts in the UK or Treasuries in the US), corporate bond ETFs, and global bond funds. These can be held inside a Stocks & Shares ISA (UK), SIPP, Roth IRA (US), or taxable brokerage account.
The expense ratios on bond ETFs and index funds tend to be low — similar to equity index funds — making them a cost-effective way to access fixed income.
Individual bonds
Buying individual bonds is possible but typically requires larger minimum purchases (£/$ 1,000+ per bond) and more active management. For most retail investors, bond funds are more practical.
In the UK, you can buy gilts directly through the UK Debt Management Office. NS&I (National Savings and Investments) also offers Premium Bonds and savings certificates, which while technically different from bonds provide the government-backed security of gilts with more flexibility.
6. Bonds for younger investors: the practical take
If you’re in your 20s and investing primarily for retirement or long-term wealth, a high allocation to bonds probably isn’t the right move. The long time horizon means you can ride out stock market volatility, and the higher long-term returns from equities are more important.
That said, understanding bonds matters for a few reasons. You’ll encounter them in pension funds, in advice about portfolio allocation, and in the broader conversation about interest rates and the economy. And as you get older, your portfolio will likely shift toward including more bonds.
For now, the most useful thing is knowing what they are, roughly how they behave, and how they fit into the bigger picture. Index fund investing for beginners is a good complement to this if you’re building your understanding of passive investing.
7. Common mistakes
Confusing bond safety with bond fund stability. Individual bonds held to maturity return face value (barring default). Bond funds can and do fall in price when rates rise — as 2022 demonstrated. They’re not a “safe” cash substitute in the short term.
Assuming bonds are for retirees only. Bonds serve a purpose in almost any portfolio as a volatility buffer. The allocation, not the instrument, changes with age.
Ignoring the yield curve. The relationship between short and long-term bond yields (the yield curve) is one of the more reliable economic indicators and worth understanding as you learn more about financial markets.
Where to go next
If you’re at the beginning of your investing journey, how to start investing in your 20s covers the foundational steps. And if you don’t have a brokerage account yet, how to open one walks through the process.