What is a bond?

This article is part of the investing basics series from InvestingHero.ch

This article isn’t providing investing advice, but the broader ‘what is a bond’ topic.

Because in Switzerland, right now, bonds are not an attractive option due to negative interest rates. 🇨🇭 👎

That’s right — Swiss bonds are returning negative yields. You’d be losing money buying them.

And CHF hedged versions should also be considered very carefully due to the extremely low yields and currency exchange risk, you could simply hold CHF cash instead.

That said, lets move onto the basics behind what bonds actually are.

What is a bond in finance?

A bond is essentially a loan. When you buy a bond, you are lending your cash to the issuer of the bond, in return for a set interest rate over a defined term.

Examples of bonds

There are many different types (from a ‘zero coupon bond’ to a treasury — over 20 in fact) but if you’ve been asking ‘what is a government bond?’ — this is where you’ll find them. Here are a few examples of the most common bonds in the market place:

Government/Sovereign Bonds — Bonds which are issued by governments and backed by the country they are from. Think US treasury as an example, typically very low risk as they are backed by an entire government.

Municipal bonds — Issued by local governments and give investors the ability to invest in more ‘local’ activities and projects such as infrastructure, new schools, hospitals etc.

Corporate bonds — These are issued by companies and corporations. They will often have the highest yields, although are also among the most risky.

Bonds vs stocks — what’s the difference?

While you will typically have both asset classes in a balanced portfolio, the varying risk, performance and how they are structured, make for some quite big differences between the two.

For instance, the risks of bonds are generally a lot lower than stocks. Which means in times of volatility and uncertainty, bonds are less impacted by market movements — although it’s important to note they will still move in either direction, but historically less so than stocks.

Related article: What is a stock?

Deciding on the ‘right amount’ of bonds in your portfolio will depend on several factors, such as your age, current portfolio allocation, investment horizon and future goals.

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