Bonds and government debt

The lesson in full

Governments and companies often need to borrow. Instead of asking one bank, they borrow from thousands of people at once by selling bonds.
A bond is an IOU. You lend, say, 1,000 for 10 years; the borrower pays you a fixed interest, the coupon, then returns the 1,000 at the end.
Every country has them: US Treasuries, UK gilts, German Bunds, Indonesia's SBN (including retail ORI bonds), Mexico's Bonos and CETES, Spain's Bonos del Estado.
The seesaw: when interest rates rise, older bonds with lower coupons look less attractive, so their prices fall. When rates fall, older bonds gain.
Real example: in 2022, as central banks raised rates fast, a global index of high-quality bonds lost about 16%, its worst year on record.
Common mistake
Mistake: “bonds can't lose money.” Hold to the end and a solid borrower repays you in full. But sell early after rates jump, or lend to a weak borrower, and you can lose.
Key takeaway
A bond is a loan you give. Rates up, bond prices down. Rates down, bond prices up.

A bond is... A loan you give to a borrowerYou lend money; the borrower pays interest and repays the loan at the end.
The regular interest payment on a bond is called the... CouponThe name comes from old paper bonds, which had coupons you cut off to collect each payment. Dividends come from shares, not bonds.
When interest rates rise, existing bond prices usually... FallNew bonds pay more, so older bonds with lower coupons must get cheaper to compete.
Why did many bond funds lose money in 2022? Interest rates rose quicklyFast rate hikes pushed down the prices of existing bonds.