When you invest in a bond, you’re not buying ownership in a company, as with equities, but rather lending money to a borrower. At its heart, therefore, a bond is a form of debt. The borrower could be a corporation, a municipality, or a government. In return, they agree to pay you interest, typically on a twice-yearly basis, and return the full amount – called the ‘par value’ or ‘face value’ – when the bond reaches its maturity.

For example, imagine lending CHF 1 million to a well-established utility company via a five-year corporate bond with a 3.5% annual coupon. You would receive CHF 35,000 in interest each year and your CHF 1 million back at the end of the term, provided the company remains solvent. That fixed return and contractual repayment schedule is what makes bonds such a cornerstone of conservative investment strategy.

Governments also use bonds – government bonds such as Swiss Confederation bonds or US Treasuries – to finance infrastructure, services, and national debt. Central banks even buy and sell bonds to influence the economy, controlling inflation and interest rates through these mechanisms. In every case, bond investors are essentially lenders helping to fuel economic activity in exchange for income and capital preservation.

The stability advantage over equities

If equities are speedboats – fast, agile, and exciting – then bonds are the reliable yachts of the investment world. They may not surge ahead in bull markets, but they are far less likely to capsize in storms. Bonds generally offer less price volatility than stocks, and their fixed interest payments can provide a stabilising effect on your overall portfolio.

Portfolio diversification is therefore one of the main reasons investors include bonds in their asset mix. During periods of economic uncertainty or market downturns, bonds often act as a buffer, especially when equity markets become unpredictable. They are also essential tools for meeting specific future liabilities, such as tax payments, philanthropic giving, or family expenses, where capital preservation is critical.

Why bond prices move with interest rates

While bonds are often viewed as stable, their prices do move, especially in response to interest rates. There’s a simple principle at play here: when interest rates rise, bond prices fall, and vice versa. This inverse relationship can affect your returns if you’re trading bonds before maturity.

Let’s say you hold a ten-year investment grade bond yielding 3%. A year later, new bonds are issued at 5% due to rising interest rates. Your bond becomes less attractive, so it trades at a discount. If rates fall and new bonds yield only 2%, your 3% bond becomes a hot commodity, trading at a premium. 

Understanding this dynamic is key to bond investing, especially in today’s fluctuating economic landscape. Active managers will often adjust the duration – a measure of a bond’s sensitivity to interest rates – of their bond holdings to protect capital or seize opportunities.

Different bonds, different risks and yields

Not all bonds are created equal. Some offer low risk and modest returns, while others provide higher yields with greater uncertainty. Knowing the landscape is vital.

Government bonds, especially from stable countries, are typically the safest. For example, UK Gilts or German Bunds have minimal credit risk, meaning there’s very little chance the government will default on its payments. However, their bond yields are usually lower as a result.

At the other end of the spectrum are high-yield bonds, also known as “junk” bonds. These are issued by companies with lower credit ratings and a higher likelihood of default. To compensate for the added risk, they offer significantly higher returns. For example, a high-yield bond might pay 7% or more, compared to 2–3% for investment grade debt.

Between these extremes lie corporate bonds, which span a wide range of risk profiles. Bonds rated BBB or higher are considered investment grade bonds – a classification that signifies a relatively strong financial position and low risk of default. Bonds rated below this threshold may still be viable for return-focused investors but require careful scrutiny and expert guidance. Higher potential returns usually come with increased risk. A well-structured bond portfolio should blend different types of issuers, maturities, and ratings to manage exposure effectively.

Below we highlight the different credit ratings and what they mean:

How to invest in bonds

As an investor, you have several options when it comes to fixed income investments. You can purchase individual bonds tailored to your risk profile and maturity preferences through a wealth adviser or private bank. Alternatively, you might invest in bond funds or exchange-traded funds (ETFs), which offer instant diversification across multiple issuers and sectors.

Some investors build laddered portfolios – holding bonds with staggered maturities – to ensure regular cash flow and reduce reinvestment risk. Others may seek active management, where professional teams adjust the holdings based on interest rate forecasts, economic outlooks, or sector trends. The most sophisticated portfolios often combine both passive and active elements to capture opportunities while maintaining a solid foundation.

Bond strategies can be customised for nearly any goal, whether it’s preserving wealth, generating income, or positioning tactically in a shifting rate environment. As with any investment, the key is alignment: ensuring the strategy matches your objectives, liquidity needs, and long-term vision.

Bonds as your financial anchor

In today’s uncertain world, bonds remain a compelling investment choice, and could offer predictability, security, and essential portfolio diversification. They are the financial anchor in your broader investment strategy: steady, dependable, and critical for navigating both calm and stormy seas.

With the right guidance and strategy, bonds can become a cornerstone of your financial journey – helping preserve capital, deliver income, and ensure your wealth is working with purpose. Like a finely weighted anchor, they help keep your financial ship steady, whatever the tide may bring.