Bonds

Bonds are units of debt issued by companies and public authorities that can be converted into tradable financial instruments. Simply put, bonds are just a form of borrowing and have different names depending on the profile of the issuer and where the money is being used. For example, local authorities can borrow money to invest in infrastructure projects or refinance public debt with municipal bonds, and public and private companies can obtain project finance through corporate bonds (e.g. green bonds, sustainability bonds, sustainability-linked bonds, social bonds, etc.).

Instead of borrowing money from banks, the issuer of the bonds receives money from investors willing to buy them (such as institutions, companies or the public) against an interest rate called a coupon. The reason is simple. Most of the time, the coupon rate is lower than the rate paid for a bank loan but higher than the rate charged for a bank deposit. Investors are drawn by the high security of their investment and the fact that bonds, like shares, can be traded on the stock exchange and liquidated before maturity.

Another advantage for the bond issuer is that the money borrowed can usually be repaid at maturity, i.e. the end of the loan period. Until then, the issuer only pays the coupon to the investor at a pre-determined frequency.

The coupon rate is directly proportional to the risk level of the bond, which is mainly determined by the score assigned to the issuer by one of the international rating agencies (e.g: Fitch, Standard & Poor or Moody’s). The better the score, the lower the coupon rate paid by the issuer.