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Bonds

Bonds are a popular way to raise capital for companies and government bodies (federal government, cantons, communities). The borrower of a bond issue is also known as the issuer. Bonds are a popular investment vehicle for investors. Investors buy bonds with the aim of getting back their capital, plus interest. The return on a bond investment can increase or decrease depending on the buying and selling price.

Bonds are debt securities. Investors who buy bonds do not own a stake in the equity capital (such as shares conferring equity rights) but loan the issuer debt capital for a certain period of time. Bonds involve less risk than shares, although this does depend on the credit rating of the borrower. The yield is also limited, however.

Bonds may feature a fixed or floating interest rate (coupon) and have a predetermined duration and form of redemption (repayment). Special types of bonds such as warrant bonds and convertible bonds are part of the product universe listed or admitted to trading on the SIX Swiss Exchange.

In principle, bonds are sold on the basis of nominal values. The denomination varies depending on the issuer and issues usually have denominations of CHF 1'000, CHF 5'000, CHF 10'000 or CHF 100'000. Bonds can either be placed privately or listed/admitted to trading on a stock exchange (primary or secondary listing). If a bond is listed on the stock exchange, the issuer is obliged to produce an issuing prospectus. The issuing prospectus is the legal basis and contains all the key conditions connected with the debt security.

In the case of a public offering (issue) with a stock exchange listing, two phases are distinguished:

Primary market Bonds can be bought at the time of the issue and held until maturity. When bonds are bought at the time of issue, the technical term for this is primary market.
Secondary market Bonds can also be bought and sold after the issue and before maturity. This is referred to as secondary trade and takes place on the stock exchange. The market price of bonds is determined by supply and demand.

Apart from its nominal value, another important feature of a bond is its current market price, which is the price at which it can be purchased on the stock exchange. The market price is expressed as percentage (e.g. 100.24%).

As interest-bearing securities, bonds have two main features: interest payments and debt capital base.

Interest payment in return for lending capital

In return for lending money, the investor is paid interest on an annual basis. In the case of zero bonds (which do not pay any interest), the investor is usually compensated in the form of a lower issue price

The interest rate depends on the duration, the capital market conditions at the time of issue and the credit rating of the company in question. The creditworthiness refers to the issuer's solvency, which may vary. The interest rate may be fixed throughout the duration or adjusted on the interest dates.

Normally, the borrower pays the full nominal amount of the bond back to the lender at the end of the duration. This is called "repayment". If the bond is sold on the stock market before the end of the duration, repayment goes to the owner who holds the bond at the end of the duration. The method for calculating bond prices is described under bond valuation.

Bonds represent borrowed capital

Bonds are borrowed capital and not equity capital of the type provided in the case of shares. The difference is that that:

  • the bond accrues interest independently of the company's profit performance;
  • it is repayable by the issuer, because the capital provided is similar to a loan;
  • if the company is liquidated, bond holders are first in line to claim back their money from the estate in bankruptcy and are therefore in a better position than shareholders.

Unlike shares, bonds do not confer any membership rights on the investor (participation in general meetings, voting rights).