Bonds-what you need to know to invest with confidence.

Bonds can be a very good investment option for both beginner and more experienced investors. When building an investment portfolio, it’s worth considering allocating at least part of your capital to this type of asset.

Contents

What is a bond?
What types of bonds are there?
How are bonds categorized?
What are wholesale and retail bonds?
What is Catalyst?
What are the risks of investing in debt securities?
How is bond income taxed?

Bonds are securities issued by various entities, such as the State Treasury, municipal companies, or corporations. Investing in bonds can be a good option for people looking to invest their savings in a relatively safe way. These types of securities carry lower risk than stocks, but they also offer lower rates of return. However, it’s important to remember that investing in bonds involves certain risks, such as interest rate risk or inflation risk. Before deciding to invest, it’s worth carefully analyzing the current market situation, because if interest rates rise, the value of bonds may decrease.

What is a bond?

A bond is a security in which the issuer acknowledges a debt to the bondholder and commits to fulfilling a specific obligation. These securities fall into the category of debt financial instruments. Simply put, when you buy a bond, you are lending money to the issuer.

Unlike shares, owning bonds does not grant any ownership rights over the issuer.

Bondholders are not co-owners of the issuer and are not entitled to dividends from its profits. They also have no right to participate in general meetings.

In general, bonds are considered a safer investment than shares and are often used as an alternative to bank deposits. Their value tends to be more stable than that of shares, but the potential returns from bond investments are usually lower.

What types of bonds are there?

For the average investor, bonds can be divided into three main types:

Treasury bonds
Municipal bonds
Corporate bonds

Treasury bonds are issued by the State Treasury and guarantee the return of invested funds along with interest. They are considered one of the safest investment products, as the issuer is the state, which is responsible for the liabilities with all its assets. The level of security is higher than that of privately issued bonds. The interest rate depends on the bond’s maturity period and typically ranges from a few to over a dozen percent per year.

Detailed information on purchasing Treasury bonds can be found here: link

Municipal bonds are issued by local government units, such as cities and municipalities. These securities carry a higher level of risk compared to treasury bonds but typically offer higher rates of return. The interest rate, as with treasury bonds, depends on the maturity period and generally ranges from a few to over a dozen percent per year, depending on prevailing market interest rates.

Corporate bonds, on the other hand, are issued by companies as a means of raising capital. For many companies, issuing bonds is a more cost-effective financing method than taking out loans or issuing new shares. These securities carry a higher level of risk than treasury bonds but typically offer higher rates of return.

How are bonds categorized?

Bonds can also be classified based on their face value and interest rate structure.

Zero-coupon bonds are typically issued at a discount to their face value and repay the full amount in a single payment at maturity. These bonds do not pay interest during their term, and the investor’s profit comes from the difference between the purchase price and the amount received at maturity.

Bonds can also be classified based on their face value and interest rate structure.

Coupon bonds provide periodic interest payments, known as coupons, made by the issuer to the bondholder. The size of these payments often depends on the credit rating of the issuer. At the end of the period, the bond is redeemed at face value since the interest has already been paid throughout the bond’s term.

Bonds can have either fixed or variable interest rates.

Fixed-interest bonds have a constant interest rate throughout the life of the bond.

Variable-interest bonds, on the other hand, have interest rates that fluctuate over the term of the bond, typically based on changes in market interest rates.

The coupon rate for variable-interest bonds is often expressed as a formula, such as:

base rate + x%, e.g., WIBOR + 2.5%. In this case, if WIBOR is 7%, the interest rate would be 9.5%.

It is also possible for interest rates to be tied to inflation, such as with anti-inflation bonds issued by the Polish State Treasury, among others.

Worth a read: link

What are wholesale and retail bonds?

When investing in debt securities, you may also come across commonly used concepts such as wholesale and retail bonds.

Wholesale bonds are securities issued by the State Treasury. They are intended for institutional investors and are used to manage public finances. These bonds are typically sold through auctions in which banks and large financial institutions participate.

Direct access to auctions at the National Bank of Poland is reserved exclusively for entities with the status of Treasury Securities Dealer (DSPW) and for Bank Gospodarstwa Krajowego. Other investors interested in purchasing these securities must do so through a DSPW intermediary. A characteristic feature of the wholesale Treasury Securities (SPW) market is the relatively high nominal value of the instruments offered PLN 1,000 in the case of bonds and PLN 10,000 in the case of treasury bills.

Retail bonds are securities issued by the State Treasury and intended for individual investors. These securities are sold through public offerings, and their nominal value is typically PLN 1,000. The amount of interest depends primarily on the bond’s duration and the prevailing market interest rates.

Worth a read: link

What is Catalyst?

If we purchase bonds directly from the issuer, the transaction takes place on the primary market. Fortunately, we don’t always have to wait until the bond’s maturity to get back the borrowed money. The Warsaw Stock Exchange has created a dedicated bond trading platform called Catalyst.

Catalyst is a bond market established on September 30, 2009, by the Warsaw Stock Exchange. It centralized previously scattered trading in corporate and municipal bonds and enabled real-time market pricing of these instruments.

The section of Catalyst intended for retail investors operates as part of the WSE and follows its regulations. To invest on Catalyst, you need a standard brokerage account—often the same one used for buying shares.

What are the risks of investing in debt securities?

Bonds are generally regarded as very safe investment instruments. However, it is important to be aware of the risks associated with investing in debt securities.

The most common risks include:

Credit risk – the risk that the bond issuer becomes insolvent. If the issuer fails to meet its obligations, investors may lose part or all of their invested capital.
Market risk – the possibility of bond price fluctuations on the secondary market. If an investor decides to sell bonds before maturity, the sale price may be lower than the purchase price.
Interest rate risk – the risk that rising market interest rates will lead to a decrease in the value of existing bonds.
Inflation risk – the erosion of the real value of returns due to rising inflation.

How is bond income taxed?

It is also important to remember that profits from bond investments are subject to taxation. As with shares, income from debt securities is taxed at a rate of 19%.

Despite being in operation since 2009, the GPW Catalyst bond market remains relatively underestimated and unpopular among investors. Many perceive the bond market as too stable and, paradoxically, too speculative to attract their interest.

However, bonds often serve as a counterbalance to stocks. With some basic knowledge about these instruments, they can significantly improve the overall return on an investment portfolio.

You can find basic information about stocks here: link

An investor should view bonds as a slightly improved alternative to a bank deposit and recognize that they should be included in any well-diversified investment portfolio.

We encourage you to visit our website regularly and expand your knowledge.