Investing 101, Part 3: Deposits and Bonds, the Calm Side of a Portfolio

The Calm Side: Is It Really Calm?

In Part 2 we looked at index funds, the tool most beginners use to own stocks. Stocks can grow your money, but they also shake. So many people keep another part of their money in a calmer place: bank deposits and bonds.

Both are, at heart, the same simple deal: you lend money, and someone pays you interest for it. The difference is who you lend to, what protects you, and what can go wrong. In this article we explain both from zero, word by word. We also show that the rules are different in every country, because the country decides how safe a deposit is and how you can buy a bond.

Quick dictionary

WordMeaning in plain EnglishInterestThe payment you receive for lending your money.DepositMoney you leave in a bank. The bank owes it back to you.Term deposit (CD)A deposit you agree to leave for a fixed period.Deposit guaranteeA national scheme that pays you back if a bank fails, up to a limit.BondAn IOU from a government or a company that pays interest.IssuerThe one who borrows by selling the bond.Face value (par)The amount the issuer promises to repay at the end.CouponThe regular interest payment on a bond.MaturityThe date the bond ends and the face value is repaid.YieldThe return you earn on a bond at its current price, if you hold it to the end.DefaultWhen the borrower fails to pay interest or the face value.

Bank Deposits: The Simplest Lending Deal

When you put money in a bank, you lend it to the bank. The bank uses it for loans and pays you interest. You do not need a broker. You open an account and send money in.

There are two common forms. A normal savings account usually lets you take your money out when you want, and the interest rate can change. A term deposit, which in the US is called a certificate of deposit or CD, is "a type of savings account" where you agree to leave your money for a set period, called the term or maturity date. If you take it out early, you pay a penalty fee to the bank [CFPB]. So a term deposit trades flexibility for a clearer deal, and you should compare both the interest rate and the penalty.

What makes deposits special is the deposit guarantee. In most countries, a national scheme pays you back if your bank fails, up to a limit. In the US, for example, deposits are insured up to at least $250,000 per depositor, per ownership category, at each insured bank [FDIC]. That is why a deposit feels safe. But notice two things.

First, the guarantee covers a bank failure, not inflation. If your deposit pays 3% and prices rise 5%, you lose buying power even though your money is fully protected. In Part 1 we saw that cash-like investments earned only 0.5% a year above inflation in the US from 1900 to 2025 [UBS]. The simple test is to compare the deposit rate with the inflation rate in the currency of your deposit.

Second, the guarantee covers deposits, not investments. The FDIC states clearly that it does not cover stocks, bonds, mutual funds, or US Treasury securities [FDIC]. Remember this when you read about bonds below.

Bonds: An IOU With a Calendar

A bond is "a debt security, like an IOU" [Investor.gov ]. You lend money to the issuer. The issuer promises two things: regular interest, and the face value back on a set date, the maturity. The regular interest payment is called the coupon. Bonds typically pay on a regular schedule, such as every six months [Investor.gov ].

Here is a simple example. You buy a bond with a face value of 1,000 and a 3% coupon that pays every six months, with 10 years to maturity. The coupon is 3% of 1,000, which is 30 a year, paid as 15 every six months. Over 10 years you receive 300 in interest, and at the end you get your 1,000 back (my calculation). If the issuer keeps its promise, you know the cash flow from day one. That is why bonds are called "predictable".

The pitch for bonds is the same in every country. According to the US regulator, they offer "a predictable income stream", can help preserve your money if you hold them to maturity, and can balance the ups and downs of stocks [Investor.gov ].

Deposit, government bond, company bond, bond fund: a quick comparison

Bank depositGovernment bondCompany bondBond fundYou lend toA bankA governmentA companyMany borrowers, through a fundDeposit guarantee?Yes, up to your country's limitNo. It is not a bank deposit (the US FDIC excludes Treasuries and bonds)NoNoMain riskBank fails above the limit; inflationPrice moves with interest rates; inflation; government creditDefault; price moves with ratesYou can lose money; rate and credit riskLeaving earlyTerm deposit: penalty feeSell at the market price, which can be above or below face valueSame, and it can be harder to find a buyerSell fund shares at the market or fund price

Who Issues Bonds, and How Do We Judge Them?

Issuers are mainly governments (national and local) and companies. They borrow to run operations, pay old debts, or finance projects such as schools, roads, and hospitals [Investor.gov ].

How do you know if an issuer will pay you back? One tool is the credit rating, a letter grade that estimates how likely a company or government is to repay its debt, issued by an independent agency [SEC, Credit Ratings]. On common scales, "BBB-" or higher is investment grade. Anything lower is called "speculative" or high yield, which people also call "junk" [SEC, Credit Ratings]. High-yield bonds pay more interest, because there is a higher risk of default [SEC, High-yield]. That is the basic law of bonds: more interest means more risk.

Treat ratings as one input and not as a promise. The SEC warns that a rating is not investment advice, that highly rated bonds can still default, that ratings can change "at any time, without warning", and that many agencies are paid by the issuers they rate, which can create a conflict of interest [SEC, Credit Ratings].

Why Deposits and Bonds Sit in Portfolios

Because the ride is calmer. The long UBS data for the US shows the idea: from 1900 to 2025, bonds returned 1.6% a year above inflation, against 6.6% for stocks. One dollar in bonds grew to 284, while the same dollar in stocks grew to about 124,854 (before adjusting for inflation). But a mix of 60% stocks and 40% bonds never lost more than 50% in real terms, while stocks alone and bonds alone each lost more than 70% several times [UBS]. In plain words: you give up some growth, and in return the ride is smoother, at least on average. Notice also that the data says bonds themselves had very bad periods, which brings us to the next point.

The See-Saw: When Interest Rates Rise, Bond Prices Fall

Here is the idea that confuses most beginners. A bond has a fixed coupon, but a bond can also be sold before maturity, and its market price moves. When market interest rates rise, new bonds pay more, so older bonds with lower coupons become less attractive. To sell one, you may have to accept a discount [Investor.gov ]. In the words of the SEC: "When market interest rates rise, prices of fixed-rate bonds fall" [SEC, Interest Rate Risk].

The SEC gives a clear example using our kind of bond: face value 1,000, a 3% coupon, 10 years to maturity. If market rates rise from 3% to 4%, the bond's price one year later is about 925. If rates fall from 3% to 2%, the price rises to about 1,082 [SEC, Interest Rate Risk]. Two words help here:

1) Yield to maturity is the total return you would earn if you buy at today's price and hold until the end. When the price falls, the yield rises [SEC, Interest Rate Risk].

2) Duration is a number, measured in years, that shows how sensitive a bond's price is to a 1 percent change in interest rates. Higher duration means bigger price swings [FINRA].

There is good news for patient investors. The SEC says that if you plan to hold a bond to maturity, the day-to-day price moves "may not be as important to you", because you still receive the interest and the face value [SEC, Interest Rate Risk]. The catch is that you must really hold it, and that the issuer must really pay. Also, even a government backing does not protect the market price: the bulletin notes that the US government does not guarantee the market value of a bond if you sell before maturity [SEC, Interest Rate Risk].

The Full Risk List, in Plain Words

Regulators list the same family of risks for bonds [Investor.gov ] [FINRA]:

1) Interest rate risk: rates rise and the price of your bond falls (see above).

2) Credit or default risk: the issuer may fail to pay interest or the face value.

3) Inflation risk: inflation reduces buying power, which hurts anyone who receives a fixed interest rate. Some bonds are linked to inflation, such as US TIPS, and they mostly avoid this risk [FINRA].

4) Call risk: some bonds can be repaid early by the issuer, often when interest rates fall.

5) Reinvestment risk: after an early repayment, you may not find a new investment with a similar return.

6) Liquidity risk: when you want to sell, you may not find a buyer at a fair price.

"Calm" Is Not "Safe": What Happened in 2022

Many people think a mix of stocks and bonds always protects you. Then came 2022. A portfolio of 60% US stocks and 40% 10-year US Treasury bonds fell 17.5%, its worst year since 1937 and the fourth-worst year in 200 years of data. Stocks and bonds both lost money. Central banks were raising interest rates to fight the highest inflation in 40 years, and the usual pattern, where bonds rise when stocks fall, broke down [Morgan Stanley IM]. The data in that report ends in 2023, but the lesson is permanent: bonds are calmer on average, not in every year.

Bond Funds and Bond ETFs

Instead of picking single bonds, many people buy a bond fund. It works like the funds from Part 2: a pot of money from many investors that buys many bonds. Bond funds and income funds "mainly invest in bonds or other debt securities" [Investor.gov , Bond Funds]. The same practical rules from Part 2 apply: you buy through a broker, you check the fund's ISIN and exchange, and you check the expense ratio and trading costs.

Three points to remember. You can lose money in a bond fund, because bonds and bond funds are not risk-free. Funds holding longer-maturity bonds have more interest rate risk. And a fund may suffer from prepayment risk, which means some bonds are paid off early, often when rates fall, forcing the fund to reinvest at lower returns [Investor.gov , Bond Funds]. One more thing, and this is my own explanation, not a quote: a fund keeps buying and selling bonds, so it usually has no single end date to wait for. That means the "hold to maturity" comfort from the previous section does not work the same way as with one bond.

Same Tool, Different Rules by Country

Everything above is the general idea. Now the important part: the rules around deposits and bonds are set by each country, and they differ a lot. Here are four examples, so you can see how different they can be.

Deposit guaranteeRetail access to government bondsUnited StatesAt least $250,000 per depositor, per ownership category, per insured bank. Covers savings, CDs, and similar accounts. Does not cover stocks, bonds, mutual funds, Treasuries, or crypto [FDIC]Not covered in depth here. Treasuries are not covered by deposit insurance.European UnionHarmonised at €100,000 or the local-currency equivalent. Every member state must run at least one scheme that all its banks join, and branches in other EU countries are covered [European Commission] [EBA]Varies by country. Check your national treasury or debt agency.United Kingdom£120,000 per eligible person per authorised firm since 1 December 2025. High balances, for example after selling a home, are protected up to £1.4 million for six months [FSCS]Gilts (UK government bonds) can be bought through a stockbroker, a bank, or the DMO's Purchase and Sale Service. Their market value "may go down as well as up" [DMO]ArmeniaAMD 16 million for dram deposits, or AMD 7 million if you hold only a foreign-currency deposit. Individuals only. Pays out only if a bank fails [Deposit Guarantee Fund]Through Treasury Direct under the Ministry of Finance. Citizens and overseas citizens can buy. Medium and long-term bonds pay semiannual coupons, and T-bills pay at the end of the term. You apply through a participating bank such as Ardshinbank, AMIO Bank, or Ameriabank [Ministry of Finance] [Ministry of Finance, How to Invest]

Check current figures before you act. The Armenian limits come from a page last updated in June 2024, after a December 2020 increase [banks.am], so verify them with the Deposit Guarantee Fund. In the EU the limit is harmonised but each country runs its own scheme, so also read your national one.

Three lessons come out of this table.

1) The limit is a number, not a promise for all your money. If your savings are larger than the limit at one bank, the extra amount is not protected. Spreading it across banks is one way people handle that, within their local rules.

2) Currency matters. In Armenia, the protected amount is different for dram deposits and for foreign-currency deposits. A deposit in a currency that loses value against your living costs can lose buying power even if it is fully insured.

3) How you buy a bond depends on where you live. In one country you go through a stockbroker. In another, a state platform and a few banks. In a third, only certain residents can buy. The tool is the same, but the door is different.

Your own-country checklist

Before you rely on any deposit or bond, find the answers to these questions in your country. The official sources are the deposit guarantee scheme, the central bank, the national treasury or debt agency, and the financial regulator:

1) What is the deposit guarantee limit, and does it cover foreign-currency deposits?

2) Does the limit apply per bank, per person, or per account type?

3) Who is allowed to buy government bonds, and through which banks or brokers?

4) How is interest from deposits and bonds taxed, and is tax taken automatically?

5) What are the deposit rates today, and what is the inflation rate in the same currency?

Tax rules for interest and bond income differ widely between countries, and I do not quote any here. Your local tax authority or a licensed adviser can answer that one.

How Much in Deposits and Bonds? Questions, Not Numbers

Nobody can give you the right number without knowing your life. These are the questions that decide it:

1) When do you need the money? Money needed within a few years usually belongs in the calm tools. Money for decades can take more risk, as we saw in Part 1.

2) What would a bad year do to you? Remember 2022: if a 17% loss in a "balanced" portfolio would make you sell in panic, you may want more calm money. Or you may want to understand your own limits before the market tests them.

3) Do you have an emergency fund? Many people keep a few months of living costs in an easy-access deposit, before investing in anything else.

4) What does inflation look like in your currency? A deposit that beats inflation is doing its job. One that does not is just parking your money.

Decide for Yourself

You now have the two calm tools and a clear view of their limits. A deposit is a loan to a bank, protected by a national scheme up to a limit. A bond is a loan to a government or company, with no deposit guarantee, a price that moves with interest rates, and a risk that the issuer fails to pay. Both are calmer than stocks on average, and neither is calm in every year.

How much of each you hold, in which currency, and through which door in your country is your decision. This article cannot know your goals, your timeline, or your local rules, so use the checklist and read the official sources.

In Part 4, we put the pieces together: how to mix stocks, bonds, and deposits into a first portfolio, how to rebalance it, and the mistakes that cost beginners the most.

Educational content only, not financial advice. Rules, taxes, and available products differ by country, so check what applies to you. Figures from official sources were checked in October 2026, but limits and rates can change.