Bonds

What a bond is

If shares make you a co-owner, bonds make you a creditor. You have no voting rights and you do not share in the company's profit, but you are entitled to receive the promised payments, whether the company has a very good year or just an ordinary one. In the event of insolvency, creditors are usually paid before shareholders.

The elements of a bond

Government bonds and corporate bonds

Bonds differ first and foremost by issuer, and the issuer directly affects the level of risk.

• Government bonds are issued by the state to finance the budget or refinance debt. They are generally considered among the least risky instruments on the domestic market, because the state has stable sources of revenue, but they are not completely risk-free either.
• Corporate bonds are issued by companies. Because the risk that a company cannot pay its debts is usually higher, they often offer higher coupons than government bonds with a similar maturity.
• Municipal bonds are issued by local public authorities for infrastructure or local projects.

Bond prices and interest rates

Bonds can be traded on the secondary market before maturity, and their price does not necessarily stay equal to face value. The basic rule is: when market interest rates rise, the price of existing bonds falls, and vice versa.

The reason is simple. If you hold a bond with an 8% coupon and similar bonds are now being issued with a 10% coupon, nobody will pay the full face value for your less attractive bond. To sell it, you have to accept a lower price, so that the buyer earns a yield comparable to the market.