What is a bond? And what is a state note?
When you buy a bond, you are actually lending money to a company or a country. In return, you will receive annual interest. After a certain period, the bond expires and you will normally get your lent money back.
If the bond is issued by a company, it is called a corporate bond. If it is issued by a country, it is called a government bond, also known in Belgium as ‘state notes’. There are also savings certificates, in Belgium, where you effectively lend money to a bank.
Please note: a bond is still an investment and is therefore not entirely without risk. Companies and countries could go bankrupt or lack sufficient capital to pay the coupon interest or to repay the bond at maturity.
What returns do bonds offer?
Bonds are an interesting investment if you are looking for a higher return without taking a lot of risk. They typically offer a better return than a traditional savings account, whilst offering greater security than shares.
For instance, most bonds offer a fixed interest rate in the form of periodic coupon interest. So you know from the start precisely what income you can expect to receive each quarter or each year. Though there are also some bonds which have variable interest rates.
Read more about the pros and cons of investing in bonds.
How much does investing in bonds cost?
The issue price of a bond varies from bond to bond, as it is determined by the company or country that issues the bond. When a bond is resold at a later date, the selling price is referred to as the secondary price. The secondary price depends in part on the what is happening to market interest rates.
As well the issue price, you pay commission, and you will also pay withholding tax on the interest you receive.
A final point worth bearing in mind is that you will need a custody account in order to invest in bonds. KBC Brussels can provide a custody account for free.