What to know about bonds as a means of financing

When you need money, you go to financial institutions to ask for a loan. When businesses or government agencies need a lot of money, they issue bonds.

The first thing that comes to mind when talking about investing is the stock market. It is true that the world of equities is exciting. Market movements are dissected in newspapers and on television.

Bonds, on the other hand, are not as sexy. The jargon surrounding this type of financial product may seem obscure to the uninitiated. In addition, bonds are much more “cushy”, especially during a bull market, when they seem to offer an insignificant return compared to equities.

In this article, we will introduce you to what a bond is and how you can take advantage of it. But before we start, here's Monetized his social network experience?

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🚀 What is a bond?

A bond is a debt security issued by organizations (a company, a local authority or a state).

When one of these institutions (State, community or company) wants financing, the amounts they would like to have may require the presence of several creditors.

By purchasing a bond, you can become one of these creditors, in other words, by participating in the purchase of part of the debt.

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At maturity, in addition to the capital that will be repaid to you, the debtor periodically agrees to pay you (every year, every six months, every quarter or every month) based on an interest rate that you have set. in advance.

🚀 Example of a bond investment

An institution wishes to obtain a loan of 10 million euros. She decides to use a bond loan with a fixed rate.

Considering that the sum is huge, she divides this loan into 1 shares of £000 each. That said, any bond issued will cost 10 £. Then, it places the interest rate at 5% over a life of the loan of 10 years.

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If you want one of his bonds, then you have the option of acquiring one.

So if the remuneration is done every year, you will receive £500 every year for 10 years. In the tenth year, the borrower will reimburse you £500 added to your initial £10. You will therefore have an income of £5000 in total over the 10 years (£500).

🚀 Types of bonds

There are several types of bonds which can be differentiated according to the lifespan or according to the terms of payment of the coupon:

Bonds with a fixed rate

In this case, the amount of the period, of the payment of interest as well as that of the coupon is fixed at the time of the issue of this bond. The remuneration on the obligation is therefore constant over time maturity repayment.

Bonds with a variable rate

Here, the amount of the coupon will depend on the evolution of the market rate (such as the interbank rate such as Euribor) to which is added a fixed rate.

You should bear in mind that the movement of the market rate varies on the basis of a regular interval.

Bonds with zero coupon

Throughout the lifetime of the bond, this type of bond does not generate a coupon.

Single Coupon Bonds

The coupon amount in this case is fully funded and is paid directly upon maturity of this bond.

Bonds you can convert into stocks

Here, the bonds you buy can be exchanged for shares in the issuing company based on the terms that were provided when the bond was issued.

🚀 Bond Vocabulary

In terms of obligation, precise terms are used:

• The transmitter. This is the organization or company that sells the bonds.
• face value. it is the price to pay to acquire a bond.
• Interest rate ; this is the rate set by the issuer.
• Deadline ; this is the term of the loan.
• The coupon; this is the interest paid by the borrower. This term comes for the reason that bond certificates sometimes relate to detachable coupons that investors must surrender in exchange for interest. Today, certificates are stored in an electronic register.

🚀 The actuarial rate of a bond

This rate makes it possible to compare the profitability of bonds. As an example, a bond of one 5 year term and which offers a 8% coupon is not entirely more advantageous than another of 5 years always with a coupon of 5%.

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So, the 8% obligation can be expensive and offer a minimal actuarial return. If the 8% bond quotes 115%, it will have a yield to maturity of 4.575% each year.

This corresponds to a performance over a period of 5 years of an investment with an initial investment of 115 euros, which gives you 8 euros per year and this for 5 years and reimburses you 100 euros at the end.

On the other hand, if the 5% bond quotes 99%, it will have a yield to maturity of 502%. It is therefore more interesting to invest 99 euros in order to receive 5 euros each year for 5 years and get 100 euros at maturity.

Thanks to the actuarial rate of a bond, you can compare its yield value to other investments.

🔰 Benefits of a bond

Many people wonder why they should invest in bonds rather than other opportunities.

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We are going to show you some advantages of investing in bonds.

• In bonds, for the most part, this type of investment does not offer uncertainty (amount, date of capital repayment and intermediate income).
• With bonds, you have the option earn higher income to those offered by short-term investments, and this, with a lower level of risk than that presented by equity investments. This remuneration is very attractive, the issuer's rating is low.
• Bonds provide a variety of income-seeking investors with the opportunity to quickly attractive returns.
• Investments in bonds, mainly OECD government bonds, are possible with modest sums and are accessible to all.
• In addition to the fact that income is regular, bonds have the possibility of producing capital gains when market rates become lower than those of the bond held.
• Unlike investments, bonds are generally negotiable on a secondary market at any time depending on the available liquidity.

🔰 The risks of buying a bond

Investing in bonds is less risky than investing in the stock market.

But buying bonds is not without flaws, it nevertheless involves some risks that you should be aware of:

• The rise in the interest rate : when the interest rate increases, this directly causes the value of the bonds to fall. It is always not advisable to sell your bonds when the interest rate is rising.
• Inflation : it may happen that this exceeds the bond yield so the rate is fixed. At that moment, whoever holds them loses.
• Insolvency of the issuer : it may happen that a private company which has issued bonds finds itself in a situation where it is unable to honor the payment of interest and to be able to repay the amount due.
• The fall in the bond market : those who hold the bonds will see their investment quickly lose value. At that time, they will be forced to sell them at a loss.

🔰 Bond investment solutions?

We have several ways to invest in bonds.

• Invest in bond funds ; in this type of investment, the capital is guaranteed and they provide stability and security.
• Investments in bonds by ETFs ; trackers or ETFs are ways to position yourself on the bond market. This is a great way, because in 2022 ETFs accounted for more than 38% of the market in Europe.
• Invest directly in bonds ; it is one of the least accessible solutions, which is practically out of reach for retail investors, because you will have to take into account the price of the bond and the fact that you need a very diversified portfolio.

🔰 Closing

It was a question for us in this article to present to you what an obligation is, we talked about different obligations, the terms to use for its operation. We hope that you can now make a decision whether or not to invest in bonds.

🔰 Frequently Asked Questions

What is the characteristic of a bond?

You can characterize a bond by its type, denomination, face value, price, term, method of redemption and yield.

What is the difference between a bond and a stock?

A bond is a part of loan emitted by a community a state or a private company, on the other hand a share is a fraction of the capital in a company.

What is the real purpose of a bond?

Whoever issues bonds can use them for the purpose of borrowing money from the financial market. Those who buy the bonds are remunerated by interest and will receive the term provided upon issue of their reimbursement.

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We're done, we hope reading this article has opened your eyes to all the gray areas when it comes to bonds.

If so, please post your comments so we can see how we can improve to better serve you in the future.

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