A bond loan may sound complicated, but it simply means that you lend money to a company or government agency. There is often a compensation against this, ‘the coupon rate’. In this article we explain this and other financial terms. You will also find out what the advantages and disadvantages of a bond loan are.
How can I earn money with a bond loan?
With a bond loan one speaks of yields. You increase your assets on the basis of two types of returns:
- Coupon rate: the bond issuer pays a so-called ‘coupon rate’ on the loan amount. The high interest rate often depends on the creditworthiness of the bond issuer. The coupon rate is usually paid annually.
- Price return: you achieve this when the market value of your bond rises. This depends on the market interest rate, the creditworthiness of the issuer and the stock market.
How much money you earn depends of course on the level of the coupon rate. If we take a fictitious annual coupon rate of 5%, you would annually earn € 50 on a bond loan of € 1000. With a bond loan of € 10,000, this amount suddenly becomes € 500. So a bond loan only becomes interesting at higher amounts.
Types of bond loans
If you are about to invest in a bond loan, you first have to become a bit familiar with the terminology. That is why we explain a little what types of bond loans already exist.
- Floating rate note: with this bond the percentage of the coupon rate fluctuates. This often depends on the market interest rate. Because of this you never know for sure what your return will be.
- Perpetual bond: these are bonds where the maturity has not been determined in advance.
- Subordinated bond: with this type of bond you run the highest risk, although usually a higher interest rate is linked to it. Subordinated bonds are only paid after a bankruptcy.
- Convertible bond: this bond can be exchanged for shares under specific conditions (determined by the bond issuer).
Is a bond the same as a share?
No. With a bond you actually lend money to a company, while you become a co-owner of a share. A bond loan yields less than a share, on the other hand there is a low risk. More information can be found in this article.
The risks of a bond loan
In fact, a bond loan is a relatively safe way to invest your money. The lending agency is obliged to repay your invested amount, including interest. If a company goes bankrupt, however, a few years can go before you have your money back. That is why it is wise to check the bond loan rating in advance. This rating indicates how creditworthy the bond issuer is. The safest bond loan you buy from a government, because they can never go bankrupt. However, the interest rates are not very high.
Other ways to invest money
Although you have relatively little risk with a bond loan, it is annoying that your money is fixed for a longer period of time (depending on the type of bond). Suppose you need the savings all of a sudden, you can not join them. In general, the return is also lower than with other investments, so you are certainly not a millionaire . In this article you can read what you can do with your savings in addition to a bond loan.
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