Bonds: What Are They and How Do They Work?
A bond is a form of investment where you lend money to a government, municipality, or company. In exchange, you receive regular interest payments over a specified period. When the bond reaches its maturity date, the borrower repays the original loan amount in full.
Investments involve risk.
How Do Bonds Work?
A bond functions as a tradable promissory note. They are securities traded on the stock exchange, just like stocks. Bonds are typically traded in large, even lots (for example, 10,000 SEK) and are priced as a percentage of their nominal loan value.
If a bond has a nominal value of 10,000 SEK and trades at a price of 105%, it costs 10,500 SEK to purchase one lot.
Who Should Invest in Bonds?
Bonds are suitable for investors seeking long-term savings with relatively low risk and predictable returns. Generally, bonds carry significantly less risk than individual stocks.
While institutional investors trade individual bonds directly, everyday investors typically access them by investing in specialized bond funds.
Main Types of Bonds
Coupon Bonds
The most common type of bond. The holder receives regular interest payments (the “coupon”) directly to their account several times a year until maturity.
Zero-Coupon Bonds
These bonds do not pay ongoing interest. Instead, they are sold at a discount (a lower price than their nominal amount). Your return is generated when the bond matures and the issuer repays the full nominal amount.
Categories of Issuers
Government Bonds
Issued by a national government to finance public spending. They are considered very low risk because the government can raise taxes or print money to avoid default.
Corporate Bonds
Issued by private companies. They provide higher returns than government bonds but involve greater risk. If the company goes bankrupt, you may lose your investment.
Corporate bonds are rated based on their risk profile. Bonds rated BBB or higher are classified as Investment Grade (lower risk, lower yield). Bonds rated below BBB are classified as High Yield (higher risk, higher yield).
Mortgage Bonds
Issued by mortgage institutions, such as Quartal Hypotek. The capital raised is used specifically to finance long-term housing loans.
Green Bonds
Bonds where the raised capital is strictly earmarked to finance projects with positive environmental or climate impacts.
