Bond

What is a bond

A bond is a security that represents a debt obligation of the issuer towards the investor. The bondholder essentially lends their money to the issuer (a state, company or other institution) in exchange for regular interest payments and the repayment of principal at maturity.

Bonds are among the key instruments of fixed-income investing and are often used to diversify a portfolio.

Basic parameters of a bond

• Issuer – the entity that issues the bond (state, city, corporation).
• Principal (face value) – the amount the issuer will return at maturity.
• Coupon – the regular interest payment to the bondholder.
• Maturity – the date when the principal will be repaid.
• Yield to maturity (YTM) – the total expected return from the bond if held to maturity.

Types of bonds

1. Government bonds – issued by governments, considered less risky.
2. Corporate bonds – issued by companies, usually offer higher yields but also higher risk.
3. Municipal bonds – issued by cities or regions to finance projects.
4. Floating-rate bonds – the interest rate changes according to market conditions.

Advantages of bonds

• Regular passive income.
• Lower volatility than stocks.
• Can be used as a stabilising element in a portfolio.

Risks associated with bonds

• Interest rate risk – when interest rates rise, the market price of bonds falls.
• Credit risk – the risk that the issuer will be unable to repay.
• Inflation risk – inflation can reduce the real value of coupon payments.

Bonds vs. stocks

Unlike stocks, bonds provide a fixed income, but usually less upside potential. Investors often use them to protect capital and as a source of stable returns.

Bonds on the Stonkee platform

On Stonkee you can track bond parameters, their yield to maturity and credit rating. The AI analyses how including bonds affects portfolio performance and recommends an optimal weight to reach your investment goals.

Summary

A bond is a debt instrument that provides the investor with regular income and the return of principal at maturity. It is an important building block of a balanced portfolio, but it also carries certain risks that need to be monitored.