How do bonds work?
A bond is a loan an investor makes to a government, municipality, or corporation, in exchange for a promise of periodic interest payments and the return of the original amount, called principal, at a set future date known as maturity, according to 
Investor.gov. Unlike buying stock, buying a bond does not make the investor an owner of the issuer; it makes the investor a creditor, which generally puts bondholders ahead of stockholders if the issuer fails, according to the SEC's Investor.gov. The three broad categories are corporate bonds, municipal bonds, and U.S. Treasury securities, each carrying its own mix of risk, tax treatment, and typical maturity length, according to Investor.gov. Bond values move with interest rates, inflation, and the issuer's ability to pay, so a bond sold before maturity can return more or less than its face value, according to Investor.gov. This article describes how bonds function as a matter of public record; it is not investment advice.
The basic mechanics: principal, coupon, and maturity
When an entity issues a bond, it sets a face value (the principal to be repaid), an interest rate (often called the coupon), and a maturity date when principal comes due, according to Investor.gov. Bonds are commonly grouped by how far off maturity is: short-term bonds mature in under three years, medium-term in four to ten years, and long-term in more than ten years, with longer maturities generally paying higher rates to compensate for the extra time the investor's money is at risk, according to Investor.gov. Interest can be paid on a fixed schedule, float with a benchmark rate, or accrue without periodic payments in the case of a zero-coupon bond, which is sold below face value and pays the full face value at maturity, according to Investor.gov. A bond's market price moves opposite to interest rates: when rates rise, existing bonds with lower fixed rates become less attractive and trade below face value, and the reverse happens when rates fall, according to Investor.gov. Selling a bond before maturity exposes the holder to this price swing, along with the risk that the market for that particular bond is thin, according to Investor.gov.
Corporate bonds
A corporate bond represents money lent directly to a company, which generally must pay interest on schedule and return principal at maturity, according to Investor.gov. Credit rating agencies classify these bonds as investment grade or non-investment grade; the latter, often called high-yield or speculative bonds, pay more interest because the issuers are typically more leveraged, financially distressed, or newer to the market, according to Investor.gov. If a company defaults and enters bankruptcy, how bondholders get paid depends on the bond's structure: secured bonds are backed by specific collateral, while unsecured debentures rely on a general claim against the company, with senior debentures paid before subordinated ones, according to Investor.gov. Companies file these offerings with the SEC unless an exemption applies, and the 
SEC's EDGAR database lets anyone look up a company's filings before relying on a bond salesperson's pitch, according to the SEC. Corporate bond issuance is substantial: SEC data show 1,695 registered corporate bond offerings raising about $1.25 trillion in 2025 alone, according to the SEC's corporate bond offering statistics.
Municipal bonds
Municipal bonds, or "munis," are issued by states, cities, counties, and other governmental entities to pay for operations and capital projects like schools, highways, and sewer systems, according to the SEC. Investors typically receive interest semiannually and principal back at maturity; short-term munis mature in one to three years, while long-term munis mature after more than ten, according to the SEC. General obligation bonds are backed by the issuer's taxing power and full faith and credit, revenue bonds are backed by income from a specific project such as tolls, and conduit bonds finance private entities like nonprofit hospitals, where the issuer usually is not on the hook if the actual borrower defaults, according to the SEC. Interest on most munis is exempt from federal income tax and, for residents of the issuing state, often from state and local tax as well, which is why municipal bonds typically pay lower rates than comparable taxable bonds, according to the SEC. Disclosure documents, credit ratings, and trade prices for individual municipal bonds are searchable free through the MSRB's EMMA website, according to Investor.gov.
Treasury bills, notes, bonds, and TIPS
The federal government borrows through marketable securities issued and auctioned by the Treasury Department. Treasury bills mature in a few days up to 52 weeks, Treasury notes mature within ten years, and Treasury bonds typically mature in 30 years and pay interest every six months, according to Investor.gov. Treasury Inflation-Protected Securities, or TIPS, adjust their principal with the Consumer Price Index and are issued in five-, ten-, and 30-year maturities, according to Investor.gov. As of July 31, 2026, the average interest rate on outstanding Treasury bills was 3.758 percent, on notes 3.309 percent, on bonds 3.442 percent, and on TIPS 1.127 percent, according to Treasury's Fiscal Data. These securities can be bought directly at auction, without a broker, through TreasuryDirect, the government's own portal for individual investors.
Savings bonds
Savings bonds are a separate, non-marketable category of Treasury debt sold directly to individuals rather than traded on a market, and they are backed by the full faith and credit of the U.S. government, according to Investor.gov. Paper savings bonds stopped being sold at banks on January 1, 2012; today's Series EE and Series I bonds are bought electronically through TreasuryDirect. Series EE bonds sell at face value, credit interest electronically, and are limited to $10,000 in face value per person per calendar year, according to Investor.gov. Series I bonds also sell at face value and share the same $10,000 annual limit, but pay a fixed rate combined with an inflation adjustment, according to Investor.gov. Both series require a 12-month minimum holding period, and cashing either one before five years forfeits the previous three months of interest, according to Investor.gov. Interest on savings bonds is exempt from state and local tax, federal tax can be deferred until redemption or the bond's final maturity at 30 years, and interest used for qualified education expenses may qualify for an additional tax exclusion, according to TreasuryDirect's guidance cited by Investor.gov. A bond left past its 30-year final maturity stops earning interest entirely, so anyone holding older paper bonds should check their value using TreasuryDirect's Savings Bond Calculator.
Risk, protection, and where to check before buying
Every bond carries some combination of default risk (the issuer fails to pay), interest-rate risk (rising rates reduce the bond's resale value), inflation risk (fixed payments buy less over time), liquidity risk (difficulty selling before maturity), and call risk (the issuer repays early), according to Investor.gov. Bonds themselves are not covered by FDIC or NCUA deposit insurance, which apply only to bank and credit union deposit accounts; the Securities Investor Protection Corporation can replace missing securities and cash at a failed brokerage up to $500,000, including up to $250,000 in cash, but it does not protect against investment losses, according to Investor.gov. Before buying any bond other than a Treasury security, investors can verify the offering and the seller's registration through the SEC's EDGAR database and through FINRA BrokerCheck, according to the SEC. For anyone looking to act, buying Treasury bills, notes, bonds, TIPS, or savings bonds directly and without a broker starts at TreasuryDirect, and anyone holding old paper savings bonds should check whether they've reached final maturity using the calculator on that same site.