Bonds
bonds
You are the lender, not the owner
A bond is a loan. You lend to a government or a company, receive interest for an agreed term, and expect the principal back at maturity.
a defined schedule
A stated interest rate, stated payment dates and a stated maturity — known in advance, which is what makes planning possible.
the issuer matters most
Everything depends on the borrower's ability to pay. That is the question behind every other feature.
at a glance
How this one behaves
A defined schedule and a defined issuer. Both the schedule and the issuer’s ability to keep to it matter, and only one of them is certain.
- What you hold
- A loan to a government or a company
- Return
- A stated coupon, plus or minus any change in price
- Getting out
- Sell in the secondary market, which may be thin
- What drives the outcome
- The issuer’s ability to pay, and interest rates
how it works
Price and yield move in opposite directions
This is the single most useful thing to understand about bonds, and the least intuitive. A bond pays a fixed amount of interest. If prevailing interest rates in the market rise, newly issued bonds pay more — so your existing bond, paying the older, lower rate, becomes less attractive. Its market price falls until its effective yield matches what is available elsewhere. If rates fall, the reverse happens and your bond becomes more valuable.
The practical consequence is important. If you hold to maturity and the issuer pays, interim price movements do not affect what you receive. If you may need to sell early, they matter a great deal. Longer-dated bonds are more sensitive to rate changes than shorter-dated ones — the measure of that sensitivity is called duration.
Yield to maturity is the more meaningful comparison figure, not the coupon. The coupon is the stated interest on face value. YTM estimates your total annualised return if you buy at today's price and hold to maturity, accounting for whether you paid above or below face value. Two bonds with the same coupon can have very different yields.
Issuers sit on a spectrum. Government securities carry sovereign credit and are generally regarded as the reference point for credit quality in the domestic market. State development loans sit near them. Public sector and highly rated corporate issuers pay more, reflecting additional credit risk. Lower-rated corporate issuers pay more still. That extra yield is compensation for accepting a higher probability of not being paid — it is a price, not a free advantage.
Credit ratings from registered agencies are a useful starting point, but they are opinions, they are revised, and a downgrade can affect a bond's market value well before any actual default. Treat a rating as one input rather than a verdict.
risk
What can go wrong
Every investment on this site carries risk. These are the ones that matter most for this category.
credit risk
The issuer may fail to pay interest or repay principal. A higher yield usually signals that the market considers this more likely.
interest-rate risk
If rates rise, the market value of an existing bond falls. That is realised as a loss only if you sell before maturity.
liquidity risk
Many bonds trade thinly. Selling quickly, in small quantities or in stressed markets may mean accepting a worse price.
faqs
Questions about bonds
Bonds carry different risks from equity, not an absence of risk. The issuer can default, the market value can fall if interest rates rise, and some bonds are hard to sell at a fair price. A government security and a low-rated corporate bond are both bonds, and they are not remotely comparable in risk.
You would sell the bond in the market at the prevailing price, which may be above or below what you paid depending mainly on where interest rates have moved. For thinly traded bonds you may also face a wider gap between buying and selling prices. If early access is a real possibility, that belongs in the decision from the outset.
Usually because it carries more risk in some form — weaker credit quality, a longer term, poorer liquidity, or subordination in the repayment queue. Comparing yields without comparing those factors is not a like-for-like comparison.
No. Security means specific assets are charged in favour of lenders, which improves your position in a recovery relative to unsecured lenders. It does not guarantee repayment, it does not guarantee full recovery, and enforcement can be slow. It improves the odds; it does not remove the risk.
Risk and important information
Bonds are subject to credit risk, interest-rate risk, liquidity risk and reinvestment risk. Issuers may default on interest or principal, and the market value of a bond can fall below the amount invested. A fixed coupon is a contractual payment schedule, not an assurance that it will be paid or that capital will be returned. Nothing on this page is investment advice or a recommendation to buy, sell or hold any instrument.
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