Here we tell you everything you need to know about bonds, such as what they are and what different types of bonds there are.
Put simply, a bond means that the person who buys the bond acts as a lender to the issuer, that is, the party selling the bond. As compensation, the buyer receives interest, often called the coupon rate, which can be fixed or floating. When the bond's term ends, the issuer repays the nominal amount (the original value) to the bondholder.
How and when do you get money from bonds?
You receive money in the form of something called the coupon. The coupon is normally paid annually or semi-annually, but other payment frequencies may occur depending on the bond's terms.
How long is the term of a bond?
The term of a bond is usually between 3 and 5 years on the Swedish market, especially for many corporate bonds. There are also short-term bonds with terms of under one year and long-term bonds with terms from 10 years up to several decades.
What types of bonds are there?
The most common bonds are:
- Government bonds: These are issued by the state, and the money you lend goes towards financing the state's expenditure. The coupon rate is normally low because the risk is low, thanks to the state's creditworthiness.
- Corporate bonds: Issued by companies that want capital. The coupon rate and the risk depend on the company's creditworthiness. 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 operations and projects. They are often seen as lower risk than corporate bonds but higher risk than government bonds.
- Mortgage bonds: Issued by mortgage institutions to finance home loans. Mortgage bonds generally have 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, states, municipalities and mortgage institutions, and mean that capital is used for environmentally sustainable projects.
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Advantages and disadvantages of bonds
Advantages
- Stable and predictable returns: Bonds offer a stable and predictable return through regular interest payments (the coupon). If you sell before maturity, a gain or loss may arise depending on the market value.
- Lower risk than shares: Bonds are often regarded as a safer investment than shares, especially government bonds and other bonds with high credit ratings, as they tend to be less volatile.
- Repayment of capital at maturity: If the issuer is financially stable, you get the nominal amount back when the term ends. This provides a security that is not always present with investments in shares or funds.
Disadvantages
- Lower returns than shares or funds: The expected return on bonds is usually lower than on shares and funds, which makes them less attractive to investors seeking higher growth.
- Credit risk: You take on a credit risk, which means that if the issuer runs into payment difficulties the bond may lose value, and you may risk not getting all your capital back. Credit risk varies depending on the type of bond and the issuer's creditworthiness, but not getting invested capital back 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 without a coupon. Instead of periodic interest payments, the bond is bought at a price below its nominal value, and the investor receives the full nominal amount when the term ends. The return is the difference between the purchase price and the nominal value, which means the investor receives the money in arrears on the maturity date rather than on an ongoing basis as with coupon-bearing bonds.
How do you 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 the state, municipalities or companies. For broader exposure to bonds you can also buy fixed-income funds, which invest in a portfolio of different bonds and interest-bearing securities. It is also possible to create your own bonds with companies you believe in, although this requires that you know what you are doing and have a larger amount of capital.
What affects the price of a bond?
The price of a bond is affected by factors such as market interest rates, credit risk, the term and inflation. When market interest rates rise, bond prices usually fall, and higher credit risk or a long term can reduce the bond price further. Inflation also affects the price negatively, as higher inflation reduces the purchasing power of future payments.
Is it better 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 less liquid, and information about the companies may be limited, which makes them more uncertain. There are exceptions, however: some unlisted shares in stable companies may involve less risk. Bonds, especially government bonds and corporate bonds with high credit ratings, are normally a safer investment and offer stable interest and repayment of capital at the end of the term.
