CFDs are complex financial instruments and carry a high level of risk due to leverage. A significant proportion of retail investors incur losses when trading leveraged products such as CFDs. You should carefully consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your capital.
If you’re wondering what bonds are, they are debt securities issued by governments or companies to raise funds. When you buy a bond, you lend money to the issuer for a set term. In return, the issuer pays you periodic interest (a coupon) and repays the principal at maturity.
What is a Bond in practice? A loan agreement where you are the creditor. The issuer agrees to pay you a fixed or variable interest rate over the life of the bond and to return the full face value on the maturity date. It is one of the oldest and most widespread forms of investment in the world.
Bonds are classified based on who issues them. Each type has a different risk and return profile.
National governments issue these to finance public spending. They are considered the safest because the government guarantees payment. In exchange for this security, they typically offer lower coupons. U.S. Treasury bonds (Treasuries) are the best-known example.
These are issued by companies to finance operations or projects. They offer higher coupons than government bonds because the risk of default is greater. The company’s credit rating (from agencies such as S&P or Moody’s) determines how much interest it must offer to attract buyers.
A bond’s price and its yield move in opposite directions. Understanding this relationship is essential.
A bond is issued at face value—for example, $1,000 with a 5% annual coupon.
If interest rates rise, new bonds offer higher yields. Existing bonds become less attractive, and their price falls.
If rates fall, existing bonds with higher coupons become more valuable. Their price rises.
At maturity, you receive the face value. Regardless of price fluctuations, the issuer repays the original $1,000.
This dynamic is key for anyone trading bonds on the secondary market before maturity.
You buy a government bond for $1,000 with a 4% annual coupon and a 5-year maturity. Each year, you receive $40 in interest. At the end of the fifth year, the issuer repays you the $1,000. Your total interest earnings are $200.
If you need to sell before maturity and interest rates have risen to 6%, your bond is worth less in the market (approximately $920) because new bonds pay higher yields. If interest rates have fallen to 2%, your bond is worth more (approximately $1,080).
Bonds seem simple, but these misunderstandings come up frequently.
Assuming that bonds carry no risk of loss.
Ignoring the inverse relationship between price and interest rate.
Failing to consider the risk of default on corporate bonds.
A government bond from an economically unstable country may be riskier than a corporate bond from a solid company. Safety depends on the issuer, not just the type of bond.
Bonds serve specific functions within a portfolio.
Generating predictable income through periodic coupons.
Reducing the portfolio’s overall volatility.
Protecting capital in uncertain environments.
When stock markets fall, government bonds typically maintain or increase their value. This inverse correlation makes them a diversification tool.
Bonds are debt securities in which you lend money to an issuer in exchange for interest and the return of principal at maturity. Their price moves in the opposite direction of interest rates. They are essential for diversification and for understanding how central bank decisions affect the markets.