Bonds: The Predictable Part of the Portfolio

Bonds: The Predictable Part of the Portfolio

Feb 27, 2026 9 minutes

Both countries and companies can finance themselves with bonds. These instruments provide investors with predictable interest payments and help them diversify their portfolios. In this blog you’ll learn step by step how bonds work, what opportunities and risks they present, and what role they can play in your portfolio of private investments.

Table of Contents

Bonds are among the classic investment instruments in the financial markets and play a key role in long-term investment strategies. 

What Is a Bond?

Imagine that a government or a company needs capital, say for the construction of a freeway, the building of a new production site, or the re-financing of existing debt. Instead of taking out a bank loan, the issuer can issue a bond on the capital market. Investors make their capital available, and in return they receive regular interest payments along with repayment of the capital invested at the end of the term.

A bond is therefore at its core a standardized loan:

  1. Investors lend issuers a specified amount.
  2. The issuer undertakes to make interest payments (coupons) on a regular basis.
  3. At the end of the term, the face value (nominal amount) is returned to the investor, provided the issuer remains solvent.

In contrast to a traditional bank loan, a bond is securitized in the form of a security and is generally traded on the stock exchange. This means that investors can buy or sell the bond on the stock exchange even before the end of its term. 

 

The Most Important Terms Made Simple

In order to truly understand bonds, it’s worth taking a quick look at the commonly used technical terms: 

1. Face Value (Nominal Value)

The face value is the amount upon which the bond relates to – for example 1,000 Swiss francs apiece. Interest payments are calculated based on this amount. At the end of the term, this nominal value is usually repaid in full.

2. Coupon (Interest Rate)

The coupon is the contractually agreed upon rate of return that the issuer pays out annually based on the nominal value, for example 2% or 3.5%. For a nominal value of 1,000 Swiss francs and a coupon of 3%, the investor receives 30 Swiss francs in interest annually, for example in one or two tranches (annually or semi-annually) – hence the term “fixed income.”

3. Term

The term specifies how long the bond runs until final maturity. Terms range from a few months to several decades. Typically, terms for standard government and corporate bonds range from two to ten years.

4. Issuer

The issuer is one who issues the bond – for example a federal government, a canton, a city, or a bank. 

5. Creditworthiness

Credit rating (creditworthiness) is a key risk driver of a bond. Ratings agencies check the creditworthiness and assign it a letter rating ranging from AAA (highest certainty) to D (payment default) In general, the better the rating, the lower the interest rate.

6. Price

On the stock exchange, bonds are traded in percent of the nominal value. If this is traded at 100%, this corresponds to its nominal value (CHF 1,000 = CHF 1,000 market value). A price of 98% means that you are buying the bond with a reduction of 2% on the nominal value (discount). A price of 105% indicates a surcharge of 5% on the nominal value (premium).

7. Yield to Maturity

The yield to maturity is a key figure that combines the coupon, the current price, and the remaining term. It shows what annual return investors can expect to receive if they buy the bond at the current market price, hold it to maturity, and all payments occur as planned. It often deviates from the coupon – especially if the bond isn’t bought at exactly 100%.

How Does a Bond Work in Practice?

A simple example makes the concept more tangible:

You buy the following corporate bond with the following basic details:

  • Nominal value: 1,000 Swiss francs, bought at 100%
  • Coupon: 5% p.a. (per annum)
  • Term: 6 years
  • Repayment: 100% of the nominal value upon maturity

Provided you hold the bond and the issuer doesn’t default, i.e. become insolvent, the following occurs:

  • You will receive 50 Swiss francs in interest each year (5% of 1,000 Swiss francs).
  • After six years, in addition to the final coupon, the issuer will return to you the nominal value of 1,000 Swiss francs.

Your return consists largely of the coupon payments (interest) that you have received over the years. The repayment of the nominal value on the maturity date is generally not a return in the sense of a profit, but repayment of the capital that you invested. The purchase price has an additional influence on your overall return: If you bought the bond below its nominal value, you will realize a capital gain at maturity – if you bought it above its nominal value, you will accordingly incur a capital loss. Your total return is what remains after any fees and taxes have been deducted.

If the bond is traded on the stock exchange, its price is not static. If market interest rates rise or fall, or if the assessed credit rating of the issuer changes, the price of your bond in your portfolio can fluctuate daily. You can sell them at any time during the term at a profit or a loss in comparison with your original purchase price.

Why Do Private Investors Invest in Bonds?

Stocks are considered performance drivers in the portfolio since they offer attractive long-term opportunities; but their price can fluctuate sharply. Bonds often fulfill a different function: They are intended to provide stability and predictability. Typical reasons why private investors use bonds:

Predictable Yields

Through fixed coupons, investors already know when buying a bond what interest payments they can expect, assuming the issuer remains solvent. This simplifies planning, for example for recurring expenses, or for supplementing income in retirement.

Less Fluctuation Than with Equities

Compared with equities, bond prices generally fluctuate less severely. This is particularly true for short-term bonds from issuers with high credit ratings. They can therefore help reduce the overall volatility of the portfolio.

Diversification

Bonds very often react differently to economic developments than equities do. In When the equities markets go through weak phases, high-quality bonds can partially offset losses in one’s portfolio. Equities mostly react to profit and growth expectations, while high-quality bonds are more strongly influenced by interest rates and investors’ needs for security. During economic downturns, falling interest rates and flight to safe investments can support or even elevate the prices of high-quality bonds while stocks come under pressure. A mix of various investment classes, including bonds, is a key element in modern portfolio theory.

Liquidity

Unlike a typical loan transaction (as creditor), many bonds can be traded on the stock exchange. This enables investors to react early, if necessary: They can sell to generate liquidity, or make reallocations within their portfolios.

What Risks Do Investors Need to Be Aware of with Bonds?

Like all investments, bonds also carry risks that can be reduced in the financial markets, but never completely eliminated. Investors need to be aware of the following risks:

Credit Risk

The most significant risk: The issuer could run into financial difficulties. In extreme cases, interest might not be paid, or the nominal value might not be returned in full upon the maturity date. The poorer the credit rating, the higher the risk – and therefore the higher the interest rate typically demanded by investors.

Rating agencies evaluate the creditworthiness of issuers using grades such as “AAA”, “BBB”, or “B”. Bonds with very good credit ratings are labelled “Investment Grade”. Bonds with lower ratings (High Yield or “Junk Bonds”) are enticing with high interest rates, but carry significantly greater risk of default. 

Interest Rate Risks

Bonds are sensitive to interest rate changes. If market interest rates rise, existing bonds with comparatively lower coupons become less attractive – and their price drops. On the other hand, if the interest rate falls, the price of existing bonds rises due to the higher coupon.

An example:

  • You own a bond with a 2% coupon.
  • The market rate for comparable new bonds rises to 4%.
  • Investors in the new issuances receive 4%. Your 2% bond thus becomes less attractive, which is reflected in a falling price – provided you wish to sell your bond on the stock market.

Long-term bonds are impacted especially hard: The longer the term remaining, the more sensitively the price will react to interest rate changes. 

Inflation Risk

The coupons and the repayment amount of a typical bond are fixed nominally. If inflation increases significantly, your interest income loses purchasing power in real terms. A bond with a 2% coupon appears attractive if the inflation rate is 1% – but if inflation is at 4%, the real return is negative, at minus 2%.

Liquidity Risk

Not every bond is traded in high volumes on a daily basis. Especially with smaller issuers or very specialized structures, liquidity can be limited. Moreover, this can lead to larger spreads, i.e. the difference between the buy and sell price, making it difficult to exit quickly. 

Currency Risk

If a bond is issued in a foreign currency, US dollars for example, exchange rate fluctuations can play an additional role: If the dollar falls versus the Swiss franc, you will receive less money when you convert it back.

Overview of the Most Important Bond Types

The word “bond” is an umbrella term. For private investors, the distinction by issuer and by bond type is especially relevant. The following categories should be noted here in particular:

Government Bonds

Governments use bonds to finance their current expenses and investments. Bonds issued by economically and politically stable countries are generally regarded as comparatively safe, but their coupons are often moderate. Government bonds work as anchors of stability in many portfolios. However, even with government bonds, political decisions can send significant shockwaves through the markets. 

Corporate Bonds

Companies issue bonds in order to finance investments, manage mergers, or to optimize their capital structure. These range in size from global corporations with high credit ratings to smaller or financially weaker companies. Corporate bonds usually offer higher coupons than government bonds – in exchange, investors have to accept a higher credit risk. 

High-Yield Bonds

High-yield bonds are offered by issuers with low credit ratings. The coupons are significantly higher in order to offset the increased default risk. Such bonds can be yield drivers within a portfolio, but they should only be used as a supplement and with full awareness of the risk.

Collateralized Bonds (e.g. Covered Bonds)

In collateralized bonds, certain assets such as mortgage loans serve as collateral. This structure can offer additional protection, which is why the coupons are often somewhat lower than with comparable unsecured bonds from the same issuer.

Floating Rate Notes

With this type of bond, the coupon payment is not fixed, but instead adjusted regularly to a benchmark interest rate. If market rates increase, so do the coupons, and vice versa. Structures like this can help mitigate interest rate risks.

Sustainable Bonds

Sustainable bonds combine financing with climate, environmental, or social objectives by linking the bond conditions to measurable sustainability goals of the issuer.

What Should You Be Mindful of before Investing?

Before you invest in bonds, it's worth taking a structured look at a few key questions:

  • Goal and roles in the portfolio: Are you looking for stability, recurring income, diversification, or deliberately pursuing higher return opportunities in the high-yield sector?
  • Risk tolerance: How much volatility and default risk are you prepared to take on? What fits your profile? High-yield bonds? Or rather high-grade government and corporate bonds?
  • Term: Can you keep the money tied up until maturity, or might you need liquidity earlier?
  • Currency: Are you investing in your domestic currency, or are you willing to take on currency risks?
  • Tax Considerations: How are interest income and capital gains taxed in your country of residence?
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