How to Buy Bonds: A Beginner’s Guide

Bonds are loans that investors give to a company or the government in exchange for a fixed rate of return. Investors commonly buy and hold the bond until it matures, collecting cash interest payments all the while and receiving the principal back at the end of the term. This differs from other types of investing, such as stock investing, where a share or stake in a company is purchased with the hope of making a profit if the stock's value rises.

Many financial planners recommend investing a portion of your portfolio in bonds due to their lower volatility and relative safety compared to stocks.

Where to buy bonds

The easiest way to start investing in bonds is through a bond exchange-traded fund (ETF). A bond ETF is a basket of hundreds or thousands of bonds with varying interest rates and maturity dates. When you buy a share of a bond ETF, your investment is spread across all of these bonds, increasing your diversification. The largest bond ETFs are Vanguard's Total Bond Market ETF (BND) and BlackRock's iShares Core U.S. Aggregate Bond ETF (AGG).

These two bond ETFs are extremely large and diversified; however, there are also smaller, more selective bond funds available. Some funds focus on short-, medium-, and long-term bonds, and others provide exposure to specific industries or markets.

If you're looking to buy specific bonds (say, from a single company, or a U.S. Treasury bond) instead of bond funds, here are the two most common ways:

• Directly through a brokerage: You can buy specific bonds from other investors looking to sell by opening a brokerage account with a broker that offers access to bonds. Many brokerages also offer access to newly issued bonds (as opposed to existing bonds being sold by other investors on the bond market).

• Directly from the U.S. government: The federal government's TreasuryDirect website allows investors to buy government bonds directly without paying a fee to a broker or intermediary. You can learn how to buy Treasury bonds here.

» See our list of the best brokers for bond investing.

Bond price versus bond yield

Bond can be a little tricky, but here's a simplified breakdown. When you buy a bond, you'll want to consider two things: Its price and its yield. The price is what you pay for the bond, and the yield is the interest you receive. If you buy a bond for $100 with an annual yield of 4%, you'll collect your interest for 10 years, and at the end of the period, you'll get your $100 back, too.

But while that 4% interest is fixed, the price of the bond throughout that 10-year period is not. So, if you decided you no longer want to collect interest and instead want your lump sum back, you could sell your bond on the market, much like you would a stock. But various factors could influence how much another investor is willing to pay to buy your bond from you.

For example, if investors can buy new bonds with a 5% interest rate for $100, they won't buy yours with a 4% interest rate for $100. You'd have to sell yours for less than $100. Conversely, if new bonds are only offering a 3% rate for $100, your bond becomes more valuable, and investors would buy yours for more than $100.But all of that is moot if you hold your bond without selling it for the whole 10-year period.

Example of price vs. yield in bond ETFs

If you're investing in highly diversified bond ETFs (like those mentioned above), price and yield are both considerations. Let's look at the largest bond ETF, Vanguard's BND, to understand this^[0]

If the price of BND rises to $74, you could sell your share of BND for more than you bought it for. If the price of BND falls to $70, you'll lose money if you sell your share. But if you hold onto it, you'll continue to earn that average yield from the last 30 days, indefinitely.

Investing in bonds: Key considerations

Use the following three-step process to evaluate whether various bonds fit your portfolio:

1. Can the borrower pay its bonds?

The answer to this question is paramount because if a company can’t pay its bonds — its promise to pay back money lent with interest — there’s no reason for the average investor to consider buying them. With some sleuthing, you can estimate whether the company can meet its debt obligations.

Bonds are rated by ratings agencies, with three big ones dominating the industry: Moody’s, Standard & Poor’s and Fitch. These agencies estimate creditworthiness, assigning credit ratings to companies and governments and the bonds they issue. The higher the rating, the greater the likelihood the company will honor its obligations and the lower the interest rates it will have to pay. AAA is the highest, and it goes down from there, like school grades.

Corporate bonds

Beyond ratings, the quickest way to determine the safety of a company-issued bond is by looking at how much interest a company pays relative to its income. Corporate bonds generally pay higher interest than government bonds because they have a relatively higher risk of default. Like a homeowner paying off a mortgage every month, a company that doesn’t have the income to support its payments will face trouble eventually.

Begin with the company’s most recent annual operating income and interest expense, as reported on the company's income statement. This info is available for every U.S. publicly traded company in a 10-K filing, on a company's website or in the EDGAR database on the U.S. Securities and Exchange Commission's website. Operating income differs from net income because it factors out interest payments (which are tax-deductible) and taxes and is the best measure of a company’s ability to pay its debts.

Government bonds

Evaluating government-issued bonds is more challenging because governments typically don't carry substantial excess revenues that indicate stability.

The good news? Government bonds are generally considered safer investments. U.S. government bonds are often referred to as Treasury Bonds (T-bonds). They’re so safe that investors often refer to the government's interest rate as the "risk-free rate." However, in 2025, Moody's Ratings did downgrade U.S. long-term debt from AAA to AA1, citing concerns over "an increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns^[0]

Government bonds typically do not offer higher interest rates, given their low risk of default. Two exceptions are Treasury Inflation-Protected Securities (TIPS) and I bonds, whose interest rates are adjusted regularly based on inflation.

Municipal bonds

Though they've also been safe historically, municipal bonds issued by cities, states and municipalities are not quite as rock solid. You can investigate these bonds further on the Electronic Municipal Market Access (EMMA) site, which provides a bond's official prospectus, an issuer's audited financial statements and ongoing financial disclosures, including payment delinquencies and defaults.

A government's credit rating is an excellent first guide to its creditworthiness, and you can follow up to see if there are any recent defaults or other financial issues that might cause a future default or delinquency. Another benefit: Income from municipal bonds is generally tax-free at the federal level and sometimes even at the state level if you purchase them in the state where you reside.

Zero-coupon bonds

Zero-coupon bonds are bonds that do not pay interest and are often referred to as “deep discount” bonds. They’re sold at a reduced price compared to their face value, and investors profit when the bond matures. Treasury bills are examples of zero-coupon bonds.

2. Is now the right time to buy bonds?

Once a bond’s interest rate is set and made available to investors, the bond trades in what’s called the bond market. Then, prevailing interest rates dictate how the bond’s price fluctuates.

Bond prices tend to move countercyclically. As the economy heats up, interest rates rise, which can depress bond prices or even cause the bond market to crash. As the economy cools, interest rates fall, which in turn lifts bond prices. You might think bonds are a great buy during boom times, when prices are lowest, and a sell when the economy starts to recover. But it’s not that simple.

Investors try to predict whether rates will go higher or lower. But waiting to buy bonds can amount to trying to time the market, which is not a good idea.

Many bond investors “ladder” their bond exposure to manage this uncertainty. Investors buy numerous bonds that mature over a period of years. As bonds mature, the principal is reinvested, and the ladder grows. Though laddering may come at the cost of lower yield, it effectively diversifies interest-rate risk.

» Read more: How to use the yield curve to track economic conditions

3. Which bonds are right for my portfolio?

The type of bonds that are right for you depends on several factors, including your risk tolerance, tax situation, time horizon and when you need income from these bonds.

A good bond allocation might include each type — corporate, federal and municipal bonds — which will help diversify the portfolio and reduce principal risk. Investors can also stagger the maturities to mitigate interest-rate risk.

Diversifying a bond portfolio can be difficult because bonds typically are sold in $1,000 increments, so building a diversified portfolio can take a lot of cash.