Types of Bonds: 7 Kinds Every Investor Should Understand (and Why Their Prices Move)

Most people meet bonds as the dull 10% slice of a target-date fund, and never learn the types of bonds sitting inside it.

That's a mistake, because those bonds behave very differently. A Treasury bill is about as close to cash as an investment gets. A junk bond can fall right alongside stocks in a recession. And in 2022, even US Treasury bonds lost money, when 10-year Treasuries dropped almost 18% in a single year.

This guide covers what a bond is, why its price moves, and the seven types a US beginner will actually run into, with who each one suits.

What a bond is: four numbers to know

A bond is a loan, and you're the lender. The SEC's guide to bonds calls it an IOU. You lend money to a government, a city or a company. It pays you interest along the way and hands back your principal when the bond "matures."

Every bond comes down to four numbers:

• Face value (or par) is what you get back at the end, usually $1,000 per bond.
• The coupon is the fixed interest rate paid on that face value, usually in two payments a year. A $1,000 bond with a 4% coupon pays $40 a year.
• Maturity is the date the loan ends. It can be four weeks away or 30 years.
• Yield is the return you'd earn if you bought at today's price and held to the end.

The first three are set the day the bond is issued. Only the price changes after that, and the yield moves with it. That's the part that trips up most beginners.

Why bond prices fall when interest rates rise

Picture a seesaw. The SEC's bulletin on interest rate risk uses exactly that image, with market rates on one end and the price of a fixed-rate bond on the other.

If you own a bond paying 3% and new bonds start paying 4%, nobody will pay full price for yours. In the SEC's own example, a 10-year Treasury with a 3% coupon drops from $1,000 to about $925 after rates climb one point.

2022 was that lesson at full volume. The 10-year Treasury yield ended 2021 at 1.52% and ended 2022 at 3.88%.

Say Nora, 27, bought a new 10-year Treasury note for $1,000 at the end of 2021, with a 1.5% coupon. A year later, new notes were paying close to 3.9%. By our math, her note was now worth about $821 if she sold it, an 18% drop. The US government never missed a payment. Even counting the $15 of interest she collected, she was down about 16% on paper.

But if Nora holds until 2031, she still gets her $1,000 back plus every coupon. The loss only becomes real if she sells. A price drop is not the same as a default.

Different kinds of bonds took that year very differently.

T-bills never lost money, because they mature too quickly for rate moves to hurt them. And once yields were higher, the income came back. T-bills paid more than 5% in both 2023 and 2024.

Duration: the number that predicts the damage

How hard a bond gets hit depends mostly on its duration. FINRA's explainer on bond duration gives the rule of thumb. For every 1 percentage point rise in rates, a bond's price falls by roughly its duration, in percent. A fund with a duration of 6 would drop about 6% if rates jumped a full point.

Longer maturity means higher duration. That's why a 30-year bond swings far more than a 2-year note. You'll find the duration on any bond fund's fact sheet, and I'd argue it's the most useful number on the page.

The main types of bonds for US beginners

Here are the types of bonds you'll come across, roughly from safest to riskiest.

1. Treasury bills, notes and bonds

These are loans to the US government, backed by its full faith and credit. Every other bond gets priced against them. The names just describe the term. Bills mature in a year or less, notes in 2 to 10 years, and bonds in 20 or 30 years. Interest is taxed federally but not by your state or city.

Here's where yields stood on October 6, 2026, according to FRED's daily Treasury yield data:

Treasury	Yield on Oct 6, 2026
3-month bill	4.21%
2-year note	4.79%
10-year note	5.27%
30-year bond	5.64%

That 10-year figure is the highest closing level since 2002.

Treasuries suit almost everyone. T-bills work for cash you'll need soon, and longer Treasuries can be the steady part of a long-term portfolio.

2. TIPS (Treasury Inflation-Protected Securities)

TIPS fix the one thing a regular bond can't, which is inflation. The TreasuryDirect page on TIPS explains that the principal rises with inflation and falls with deflation. Interest is paid on that adjusted principal every six months. At maturity, you get the adjusted principal or your original amount, whichever is higher.

On October 6, 2026, a 10-year TIPS yielded 2.91% on top of inflation. A regular 10-year note paid 5.27%. The gap, about 2.4 points, is roughly the inflation rate the market expects. If inflation runs hotter than that, TIPS come out ahead.

TIPS make the most sense if you want your bond money to hold its buying power. A lot of people keep them in an IRA or 401(k), because the yearly inflation bump is taxable even though you don't get it until the bond matures.

3. I bonds

I bonds are savings bonds. You can't trade them, and their price never falls. According to TreasuryDirect's I bond page, I bonds bought from May 1 to October 31, 2026 earn 4.26%. That's a 0.90% fixed rate that lasts the life of the bond, plus an inflation rate that resets every six months. A new rate starts on November 1, 2026.

The catches are real, though:

• You can buy up to $10,000 a year per person, electronically through TreasuryDirect only.
• You can't cash them in for the first 12 months.
• Cash out before five years and you lose the last three months of interest.

I bonds are a good fit for cash you won't touch for at least a year, if you want inflation protection with zero price swings. Plug a few rates into our inflation calculator and you'll see why that protection matters over a decade.

4. Municipal bonds

Munis are issued by states, cities and counties to pay for things like schools and roads. The big draw is tax. The SEC's page on municipal bonds says the interest is generally exempt from federal income tax, and may be exempt from state and local tax if you live where the bond was issued. Because of that, munis pay lower rates than similar taxable bonds.

To compare, work out the tax-equivalent yield: divide the muni's yield by one minus your federal tax bracket. Take a muni paying 3.5% as an example. In the 12% bracket, that's worth the same as a 3.98% taxable bond. In the 32% bracket, it's worth 5.15%.

Munis are really for higher earners investing in a regular taxable brokerage account. If you're in the 12% or 22% bracket, or investing inside a 401(k) or IRA, the tax break is worth little or nothing. For most readers of this site, munis can wait.

5. Investment-grade corporate bonds

These are loans to companies with strong credit ratings. They pay a bit more than Treasuries because a company can go bust, and the US government has never defaulted on its bonds. They still carry interest rate risk. Baa-rated corporate bonds, the lowest rung of investment grade, lost about 15% in 2022.

They suit anyone who wants a little more income than Treasuries pay. Most total bond market index funds already hold them alongside Treasuries, so you may own them without trying.

6. High-yield (junk) bonds

The SEC's bulletin on high-yield bonds describes them as bonds from companies with lower credit ratings and a higher risk of default, so they pay more interest. It also flags the "flight to quality." When the economy falters, investors dump junk bonds for Treasuries, and prices fall right when you wanted stability.

Are they for beginners? Honestly, not many. You take on a good chunk of stock-market risk, but your upside is capped at the interest. If you want more risk, more stock index funds is usually the cleaner way to get it.

7. International bonds

These are bonds from foreign governments and companies. They spread your money across different interest rate cycles, but currency swings can wipe out the yield, so many international bond funds hedge back to dollars. A small slice is reasonable, and plenty of investors skip them entirely.

You'll also see convertible bonds, which can turn into company stock. They're a niche, and you can skip them.

Individual bonds vs bond funds and ETFs

There are two ways to own any of these types of bonds, and they behave differently.

An individual bond has an end date. Buy a 3-year Treasury note and you know exactly what you'll have in three years, whatever rates do in between. Treasuries are easy to buy this way, in $100 steps. Corporate and muni bonds are harder, because you need dozens to spread out the default risk.

A bond fund or ETF holds hundreds or thousands of bonds for a small fee, and you can sell any day. The catch is that a fund never matures. It keeps replacing old bonds with new ones, so there's no date when you're promised your money back. Its value on the day you sell depends on rates that day.

My rule of thumb: use individual Treasuries (or a CD) for a known goal on a known date. Use a low-cost bond index fund for the long-term bond slice of your portfolio. Our guide to index investing covers how to pick a cheap one.

Where bonds fit, by time horizon

A bond's job depends on when you need the money.

1. Within a year (emergency fund, next semester's tuition): T-bills or a Treasury money market fund. The price risk is close to zero.
2. In one to five years (a house deposit, a car): match the bond to the date. A Treasury note maturing near your deadline pays back its face value whatever rates do. I bonds also work if you can wait at least 12 months.
3. In five to 15 years: an intermediate bond index fund, held alongside stocks.
4. In 20 years or more (retirement, if you're in your 20s): mostly stocks. Bonds here act as a shock absorber and a pot of cash to rebalance from. Stocks do the growing.

How much to hold at each age is its own question, and our guide to asset allocation by age walks through it. Bonds matter most in the years around retirement, when a crash early on can do lasting damage. That's sequence of returns risk, and a bond cushion is one of the main defenses. For how stocks and bonds have actually behaved in past crashes, see our guide to portfolio diversification.

The short version

• A bond is a loan with four numbers: face value, coupon, maturity and yield.
• When rates rise, bond prices fall, and duration tells you roughly how far.
• Treasuries and T-bills are the safest. TIPS and I bonds protect against inflation. Munis mainly help high earners in taxable accounts.
• Corporate bonds add a little income for a little risk. Junk and international bonds are optional.
• Match the bond to the date you'll need the money, and use a cheap index fund for the long-term slice.

You don't need every type. Most people need one or two, picked for the job they're doing.