Bonds from quality issuers are considered less risky financial instruments compared to shares, therefore they are suitable for more conservative investors as well.
There are numerous opportunities for investing in bonds with different methods of interest payment.
Bonds
are issued by states, cities
or companies
with the aim of raising funds
which are returned to investors with interest upon maturity.
Unlike a share which is an equity security, a bond is a debt security. This means that the bond holder, within a certain period, is entitled to the return of the invested principal and the associated interest. Bonds are a more conservative form of investment precisely because of the payment of the invested amount at maturity, but they are neither savings nor deposits. Therefore, like all other forms of investment, they carry certain risks.
Typical bond issuers are states, local government units and companies. When investing in bonds, it is important to take into account the issuer and its rating. If assigned to the issuer, the credit ratings of leading rating agencies (Standard & Poor’s, Moody’s i Fitch) are most commonly used. A high credit rating indicates a quality issuer, while a poor credit rating is an indicator that the issuer may have payment problems.
When issuing bonds, the issuer publishes a prospectus or information memorandum or the terms of issue and other relevant documentation containing all essential elements; ISIN, nominal value, total issue amount, maturity, amount and dates of coupon payment, currency, purpose and other essential terms of issue.
The interest that the investor will receive on the invested amount is called a coupon. It represents the percentage return that the investor will receive until the maturity date of the bond, or the interest that is usually paid annually, semi-annually or monthly.
The maturity of bonds is one of the more important elements that an investor must pay attention to when making their investment decision. With exceptions, the longer the maturity, the higher the expected yield on the bond, but also the sensitivity to changes in market interest rates.
Bonds can be purchased on the primary market and can be bought and sold on the secondary market after they are issued. While some bonds are traded on the regulated market (for example, stock exchanges), they are mostly traded outside the regulated market (OTC trading).
Bonds are usually less risky securities than shares and accordingly bring moderate returns. However, the price at which bonds can be sold on the market may differ from the purchase price, which may affect the success of the investment.
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