Bonds for Beginners: Lending Money Instead of Owning Stocks

When people hear the word “investing”, most of the attention goes to stocks or even crypto.

But there is one quieter instrument that sits in the middle between deposits and stocks:

Bonds.

If deposits are like parking money at the bank, and stocks are like owning a piece of a business,
then bonds are simply:

“I lend my money to a government or company.
They promise to pay me interest and give my capital back later.”

In this post, I just want to understand bonds in a very basic way, so I know where they fit in my money layers.

(Still the same rule: this is not financial advice, just整理 my own thoughts.)

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Quick recap: my three money layers

From the previous articles, my simple map looks like this:

1. Layer 1 – Safety

   • Savings / emergency fund

   • Very liquid, very low risk

2. Layer 2 – Parking

   • Time deposits

   • Locked for some months, fixed interest, low risk

3. Layer 3 – Growth

   • Bonds and stocks (or funds)

   • Higher potential return, but prices can move up and down

Bonds live in Layer 3, but closer to the “safer” side compared to stocks.

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What exactly is a bond?

Plain-language version:

• When a government or company needs money, they can issue bonds.

• Investors buy these bonds, which means they are lending money.

• In return, the issuer promises:

  • To pay interest (coupon) regularly

  • To return the principal at maturity (end date of the bond)

So if I buy a 5-year bond:

• I’m lending my money for 5 years.

• I receive interest regularly (e.g. every 6 months).

• At year 5, I get my original capital back (if everything goes well).

It’s similar to a time deposit, but:

• With a deposit, I lend money to a bank.

• With a government bond, I lend money directly to the government.

• With a corporate bond, I lend to a company.

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Bonds vs deposits: what’s the difference?

They can look similar from far away (both pay interest), but they are not the same.

1. Who do I lend to?

• Deposit → bank

• Government bond → government

• Corporate bond → company

If the bank fails, there is usually a deposit insurance limit.
If a company fails, their bond can default.
If a government has trouble, it depends on their strength and policy.

2. Interest rate

• Deposits: one fixed rate until maturity, decided by the bank.

• Bonds: coupon rate is fixed when issued, but market price can change, so the effective yield can move up or down if I buy/sell in the secondary market.

3. Liquidity

• Deposits: normally I should hold until term ends, or pay a penalty for breaking early.

• Bonds: many bonds can be bought and sold on a market. I don’t always have to hold until maturity, but the price might be higher or lower than what I paid.

4. Risk level

Very rough ladder:

Savings (lowest risk)
→ Deposits
→ Government bonds
→ Corporate bonds
→ Stocks (higher risk)

Government bonds from a stable country are usually considered safer than most corporate bonds, but still carry more price movement than deposits.

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How can a beginner usually access bonds?

In practice, small investors often access bonds in two ways:

1. Retail government bond programmes (when available in their country)

   • Minimum purchase sometimes quite friendly.

   • Often sold through banks or online platforms.

   • Interest paid regularly into your bank account.

2. Bond funds / mixed funds

   • Instead of buying one bond, I buy a fund that holds many different bonds.

   • This spreads the risk across issuers and maturities.

   • Price of the fund can still move every day.

For a mini-series like ours, I don’t need to go deep into every product name.
I just need to remember:

“There is a way to lend money to governments/companies and get interest,
without picking individual stocks.”

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Why would I add bonds to my portfolio?

Bonds are not as exciting as stocks, but they have their own role.

1. Smoother ride than 100% stocks

Stocks can move up or down a lot in a short time.

Bonds usually have:

• Lower volatility than stocks

• But also lower long-term return potential

When combined with stocks, bonds can help:

• Reduce the overall “roller coaster” feeling

• Give some regular income (from coupons)

2. Match time horizon

If I know I’ll need some money in 3–5 years (not tomorrow, but also not 30 years), bonds can be a middle ground:

• Less risk than putting everything in stocks

• More growth potential than leaving everything in deposits

3. Psychological comfort

Not everyone can emotionally handle a portfolio that moves like a yo-yo.
Having a portion in bonds can make it easier to stay invested during stock market drops.

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The risks I need to remember

Even though bonds sound safer, they are not risk-free.

1. Interest rate risk

If market interest rates go up, existing bonds with lower coupons become less attractive, so their price goes down.

• If I hold until maturity → I still get face value back (assuming no default).

• If I sell before maturity when prices are down → I can lose money.

2. Credit risk (default risk)

• Government bonds: risk depends on the government’s financial strength and currency.

• Corporate bonds: if the company has trouble, it might not pay coupons or principal.

This is why beginners often start with strong government bonds or bond funds, not random high-yield corporate bonds.

3. Inflation risk

If inflation is very high:

• Even a “safe” bond with fixed coupon can lose purchasing power in real terms.

• Example: if a bond pays 4% but inflation is 6%, my “real” return is negative.

So again, bonds are not magic. They are just one tool.

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Where do bonds fit in my three-layer map?

Here’s how I personally picture it:

1. Layer 1 – Safety

   • Savings & emergency fund

   • Goal: sleep well tonight

2. Layer 2 – Parking

   • Deposits

   • Goal: protect short-term goals (1–3 years)

3. Layer 3 – Growth

   • Bonds (especially government or bond funds)

     • For medium-term stability + some income

   • Stocks / stock funds

     • For long-term growth

Within Layer 3, I can adjust the mix depending on my risk tolerance:

• More bonds + less stocks → smoother but slower

• Less bonds + more stocks → bumpier but potentially faster

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Simple starting questions before I touch bonds

Before I put money into any bond or bond fund, I ask myself:

1. Who am I lending to?

   • Government? Which country?

   • Company? How strong is it?

2. For how long?

   • What is the maturity date?

   • Am I okay locking this money mentally for that period?

3. What is the interest rate compared to inflation?

   • Is it at least close to or above expected inflation?

4. How would a price drop feel?

   • If the bond price drops 5–10% temporarily, will I panic and sell?

   • Or can I calmly wait and hold to maturity?

If I can’t answer these honestly, it means I’m still in the learning phase, and that’s completely okay.

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Closing: bonds as the “quiet middle child”

For me, bonds are like the quiet middle child between:

• The super careful one (deposits)

• And the hyperactive one (stocks)

They don’t give the highest returns, but they also don’t scream at me every day with huge price swings.

In a calm, long-term money plan, bonds can:

• Provide some stability

• Provide regular interest income

• Make it easier to stay invested during stormy stock market periods

In the next part of this mini-series, I want to look at the other side of Layer 3:

Stocks and index funds — why people use them for long-term growth,
and how to think about risk without romanticizing it.

If you landed here first and still feel unsure about the big picture, it may help to read this overview:

What Is Investing? A Simple Map Before I Touch Stocks.
To see how bonds sit next to deposits and stocks in my own plan, you can read:
Putting It All Together: My Simple Investing Map for the Next 10 Years.