Explore your bond choices
What is a bond?
A bond is a loan you give to a company or government. The amount of the loan is called "par value." The bond issuer agrees to repay the par value along with interest, called the "coupon," by a specified date, or "maturity."
Benefits of investing in bonds
Types of bonds you can get at Vanguard
At Vanguard, you can choose from bond ETFs, bond mutual funds, and individual bonds. Each individual bond has an issuer, which can be a company or government entity. U.S. Treasuries and agency bonds are issued by the government, while municipal bonds are issued by states and cities. There are also corporate bonds, which are issued by companies.
Bond ETFs
Exchange-traded funds that pool thousands of bonds and trade in real time throughout the day like a stock.
- As low as $1 investment minimum.
- No maturation time. They can be bought and sold at any time.
- Issued by various entities as a diversified portfolio of bonds.
- Lower risk due to diversification.
- Interest is taxable, but interest on some municipal bonds or ETFs may be tax-exempt.
- May offer lower yields compared with individual bonds, but that can vary.
Bond mutual funds
Mutual funds that invest in thousands of bonds and priced at the end of the trading day based on their net asset value (NAV).
- $3,000 investment minimum.
- No maturation time. They can be bought and sold at any time.
- Issued by various entities as a diversified portfolio of bonds.
- Lower risk due to diversification.
- Interest is taxable, but interest on some municipal bonds or ETFs may be tax-exempt.
- Yields can vary widely depending on the fund's strategy and holdings.
Individual bonds
Securities that pay periodic interest and return the principal at a specified maturity date.
- $1,000 investment minimum.
- Specific maturation date. They can be held until maturity or sold before.
- Issued by a single entity (e.g., government, corporation, municipality).
- Higher risk depending on the creditworthiness of the issuer.
- Interest income is taxable, but some municipal bonds may be tax-exempt.
- Can offer higher yields, especially if held to maturity.
Understanding bond trading and fees
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Frequently asked questions
Individual bonds are like loans you give to governments or companies. You get regular interest payments while you hold the bond, and your initial investment is paid back when the bond matures. Bond funds, on the other hand, are a collection of many loans from different investors. Bond funds can be bought and sold at any time and aren't tied to a specific maturity date.
The main difference is that individual bonds are specific loans, while bond funds are a mix of many loans. Bond funds offer more diversification because they spread your money across different loans, reducing risk. So, if you want more diversification, you might want to consider bond funds.
Like all investments, bonds have pros and cons. They're designed to provide a steady income stream through interest payments and are often less risky than stocks. However, bond yields can be lower than those of other investments.
The best time to invest depends on market conditions and interest rates. To decide if bonds are right for you, consider your goals, risk tolerance, and time horizon.
When interest rates rise, new bonds are issued with higher interest rates, which makes them more appealing to investors. As a result, existing bonds with lower interest rates become less attractive and their value decreases.
If investors sell their bonds before they mature, they may receive less money than what they initially paid because buyers can get new bonds with higher interest rates. However, if investors hold onto their bonds until maturity, they’ll receive the full face value.
Short-term bonds are bonds that have a short time frame to maturity, usually a few months to a few years. They're less risky than long-term bonds because they aren’t affected as much by changes in interest rates. The benefits of short-term bonds, compared with long-term bonds, are that they:
- Have lower risk.
- Allow you to access your money sooner.
- Can provide relatively stable and predictable returns.
You might consider short-term bonds for near-term financial goals. Short-term bonds offer liquidity, allowing easy access to funds and can reduce interest rate risk compared to long-term bonds. They can also offer higher rates than cash savings, possibly giving you more earnings than leaving your cash in a bank checking or savings account.
Bonds offer 2 main benefits in your portfolio: They provide a steady income stream and help offset some of the volatility you might see from owning stocks.
Bonds are issued by governments and companies to raise money. When you buy a bond, you lend money to the issuer. They promise to pay you back the full amount on a specific date and make interest payments, usually twice a year.
Unlike stocks, bonds don't give you ownership in a company. You won't gain from the company's growth, but you also won't face as much risk if the company struggles, as long as it can still pay its debts.
To redeem series EE or series I savings bonds, use the TreasuryDirect website for electronic bonds or visit a local bank for paper bonds. After redemption, you can transfer the funds to your Vanguard account by linking your bank account and using the Transfer Cash feature.
Interest from savings bonds is federally taxable but exempt from state and local taxes, and you’ll receive a Form 1099-INT if you redeem more than $10 in interest. If you use the proceeds for qualified education expenses, you may be eligible for the education tax exclusion.
Certificates of deposit (CDs) are bank deposits that offer an interest rate for a certain period of time. The issuing bank agrees to return your money on a specific date.
For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
Diversification does not ensure a profit or protect against a loss.
While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates. While the market values of government securities are not guaranteed and may fluctuate, these securities are guaranteed as to the timely payment of principal and interest.
Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.