Here we tell you everything you need to know about bonds, such as what they are and what different bonds are available. 

What is a bond?

In simple terms, a bond means that the buyer of the bond acts as a lender to the issuer, i.e. the person selling the bond. The buyer receives as compensation an interest rate, often called the coupon rate, which can be fixed or variable. At the end of the bond's life, the issuer repays the nominal amount (original value) to the bondholder. 

How and when do you get money from bonds?

You receive money in the form of something called coupon interest. Coupon interest is normally paid annually or semi-annually, but there may be other payment frequencies depending on the terms of the bond. 

How long is the maturity of a bond? 

The maturity of a bond is usually between 3 and 5 years in the Swedish market, especially for many corporate bonds. There are also short-term bonds with maturities of less than one year and long-term bonds with maturities from 10 years up to several decades. 

What bonds are there? 

The most common bonds available are: 

• Government bonds: These are issued by the government, and the money you lend goes to finance government spending. The coupon rate is normally low because the risk is low, thanks to the government's creditworthiness.
• Corporate bonds: Issued by companies seeking capital. The coupon rate and risk depend on the company's credit rating. Companies with lower credit ratings often pay higher coupon rates on their bonds, which also means higher risk.
• Municipal bonds: Issued by municipalities and regions to finance activities and projects. They are often perceived as lower risk than corporate bonds but higher than government bonds.
• Mortgage bonds: Issued by mortgage institutions to finance mortgages. Mortgage bonds are generally low risk because mortgage institutions have stable cash flows.
• Green bonds: These are used to finance specific environmental and sustainability projects. They can be issued by companies, governments, municipalities and housing institutions, and involve using capital for environmentally sustainable projects.

Read more: What is a business angel? 

Advantages and disadvantages of bonds

Benefits and advantages

• Stable and predictable returns: Bonds offer a stable and predictable return through regular interest payments (coupon rate). When sold before maturity, a capital gain or loss may occur depending on the market value.
• Lower risk than shares: Bonds are often considered a safer investment than equities, especially government bonds and other highly rated bonds, as they tend to be less volatile.
• Capital repayment at maturity: If the issuer is financially stable, you get the nominal amount back at maturity. This provides a level of security that is not always available when investing in shares or funds.

Disadvantages

• Lower returns than shares or funds: The expected return on bonds is usually lower than that on equities and mutual funds, making them less attractive to investors seeking higher growth.
• Credit risk: You are taking a credit risk, which means that if the issuer defaults, the bond may lose value and you may not get your full capital back. Credit risk varies depending on the type of bond and the creditworthiness of the issuer, but not getting back the capital invested is unusual for bonds with high credit ratings, such as government bonds.

Frequently asked questions

What is a zero-coupon bond?

A zero-coupon bond is a bond with no coupon interest. Instead of periodic interest payments, the bond is purchased at a lower price than its face value, and the investor receives the full face amount at maturity. The yield is the difference between the purchase price and the face value, which means that the investor receives the money in arrears at maturity instead of on an ongoing basis as with coupon bonds. 

How to trade bonds? 

The most common way to trade bonds is through banks and online brokers, where you can buy individual bonds from different issuers such as government, municipal or corporate. For a broader investment in bonds, you can also buy fixed income funds, which invest in a portfolio of different bonds and fixed income securities. You can also create your own bonds with companies you believe in, but you need to know what you are doing and have a larger capital. 

What affects the price of a bond? 

The price of a bond is influenced by factors such as the market interest rate, credit risk, maturity and inflation. When the market interest rate rises, the bond price usually falls, and higher credit risk or long maturity can reduce the bond price further. Inflation also has a negative impact on the price, as higher inflation reduces the purchasing power of future payments. 

Is it best to invest in unlisted shares or bonds? 

Investing in unlisted shares often involves higher risk than investing in bonds, but the expected return can also be higher. Unlisted shares are often more illiquid and information about the companies may be limited, making them more uncertain. However, there are exceptions: some unlisted shares of stable companies may be less risky. Bonds, especially government and corporate bonds with a high credit rating, are normally a safer investment, offering stable interest rates and repayment of principal at maturity.