For this post we will focus on bonds. U.S. Treasury bonds to be exact.
You can purchase bonds in a variety of ways, through a marketplace or directly from the Treasury. To buy bonds directly from the U.S. Government you go to treasurydirect.gov, create an account and you can purchase bonds in $100 increments as you please (while there you can also buy notes and t-bills, but those are for another discussion). You can also purchase bonds through ETF's and Mutual funds that have been curated and managed by various companies (say Vanguard).
How you purchase your bonds will determine how you accrue interest on them. If you buy direct then you will get interest every 6 months until maturity (say 30 years) at which time the purchase price of that bond will be returned to you (say a $100 bond). If you buy your bonds as part of a product (ETF) then you will receive a distribution (dividend) every so often, into perpetuity, until you sell your shares of that product.
Now, things can get tricky when you go to sell your bonds. If you purchase your bond at $100 and 2% interest, and rates go up to 2.5%, no one is going to give you face value ($100) for a 2% bond, when they can go get a new bond at the current rate. That means if you want to sell your bond, you will have to sell it for lower than face value (less than $100) to create an artificially higher yield for the new buyer, so they can have a competitive rate. This really leads to danger if you have large bond holdings and rates increase, your ability, and profitability of selling those bonds goes way down.
However that DOES NOT mean your bonds are actually worth LESS than they were the day before. They simply cannot be RESOLD in the market place for their full face value anymore. However, if you hold on to them, they still maintain their same face value to you, and their same yield. So don't let anyone tell you that your existing bond holdings are worthless if the Fed raises rates. Your bonds have the same value, so long as you retain them. This is different for packaged products such as ETF's and mutual funds, since they are traded in the market place, and can lose significant market value.
There are also corporate bonds and other forms of debt issuance that we can discuss in a later article.