Understanding and buying bonds

Now that you have an understanding of investment funds and equities, you just need to know what bonds are, to complete your basic knowledge. You may have already started investing in equities and/or funds at this stage, or you may be continuing to build up your knowledge and once you have all the cards in your hand, you will go for it. The important thing is that you go at your own pace! So let's see what bonds are and how to buy them.

Share on Linkedin

All about bonds!

Did you know?

"Luxembourg: the first European state to issue a sustainability bond"*

In September 2020, the State Treasury placed the first ever sustainable sovereign bond issued by the Luxembourg State. The bond was issued on the basis of the sustainable bond framework and represents a loan of EUR 1,5 billion that contributes to financing and refinancing projects of a sustainable nature, i.e. social and environmental.

Although governments, companies and local authorities are already using bonds, Luxembourg was the first European country to focus on sustainability.

*Source: https://gouvernement.lu/en/actualites/toutes_actualites/communiques/2020/09-septembre/07-gramegna-obligation-souveraine.html

Bonds What is a bond?

A bond is part of a debt issued by a company, organisation, or a state. When one of these entities (company, organisation or state) needs financing a project, the amounts needed may require the intervention of numerous lenders.

When you buy a bond, it’s a bit like when you lend money to somebody. Except that instead of you borrowing money from the bank, a company, a state or organisation borrows money from you. As a result, you become a creditor and receive interest for the duration of the loan at a fixed or variable rate. The interest is usually paid annually, in addition to the repayment at the final maturity of the amount you lent (but this is not guaranteed).

Depending on the denomination, i.e. the face value you buy, some bonds are more affordable than others.

Find more information in our investors’ guide

Example: A company wants to expand, and it needs money to do this. It will, in a sense, post an advertisement on the financial markets to find lenders. You can then become a creditor of the company by buying a piece of its debt, i.e. a bond.

When the issuer of a bond is a state, the rating is usually very good, which implies security for the creditor (you) in terms of repayment. Thus, it is normally safer to go for an issuer in the public sector rather than the private sector.

When you see attractive returns on bonds denominated in a foreign currency (other than the euro), don't forget that foreign exchange risk could significantly reduce your return and thus make your bond less attractive.

Watch a short video to find out more!

Reminder: Remember that in the previous article we mentioned that there is not just one stock market in the world? For bonds, it's the same as for shares; it's important that you choose the right market and that you ask your bank about the different rates.

How can I make a profit?

As explained, with bonds you play the role of the bank, i.e. you get interest, and in principle you get the money back after the loan period. Here are the ways in which you can make a profit with bonds:

You earn interest on the money you have lent, usually annually.

You get the money you lent back, when the loan matures.

You can sell a bond before its maturity date and make a profit.

This is for you, if:

you have sufficient knowledge of how bonds work;
you are prepared to take risks, because bonds only guarantee repayment of the principal at the final maturity date, unless the issuer defaults, and in the meantime the price may fluctuate on the stock exchange.

How do I invest in bonds?

As with buying shares, you need a securities account to buy bonds.

Don't have a securities account yet?

Find out how to open your securities account

Read article

Once you have set this up in S-Net, you can access the markets, which are categorised as follows:

Equities
Funds
ETFs
Bonds
Precious metals

Simply click on "Bonds" and you will find the bonds available to buy.

Warning: most bonds require a minimum investment. For this reason, you might not find them in S-Net at first glance. We recommend that you contact an advisor for support. In the current environment of all-time low interest rates, there is a reduced supply of bonds carrying an attractive return. Generally speaking, our financial analysts have reservations about the outlook for bonds in 2022.

The golden rules for investing in bonds are:

Diversify your securities and avoid taking too many risks. Bond funds from the LUXFUNDS range are a good alternative.
A good securities portfolio should be diversified and contain equities and bonds.
Invest only some of your savings, with full knowledge of the facts, so that you do not put yourself in a difficult position if the loan is not repaid.
Find out about the transaction fees payable when you invest.
Don't resell your bonds at any time, as the goal is for you to make a profit, not sell at a loss 😉.