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Bonds are interest-bearing securities, meaning that by purchasing them, you are effectively lending money to banks, countries, or companies, and in return receiving interest payments. They are a suitable investment for those seeking to invest their money over a medium- to long-term horizon and can provide a diversification strategy for your investment portfolio.
Investing in bonds
Bonds are fixed-income securities issued by banks, mortgage banks, governments, corporations, and other entities to raise capital. Unlike shares, investing in bonds does not provide you with ownership in the company. When you invest in bonds, you lend money to a bank, corporation, or government for a specified period and receive interest payments in return. From an investor's perspective, bonds are debt securities that offer a medium to long-term investment horizon. The redemption of the bond is 100 % of the nominal amount at the end of the term.
The bond issuer, such as a government, bank, or corporation, is responsible for issuing the bonds. Bonds are a debt instrument from the issuer's perspective. The issuer borrows a certain amount of money and agrees to repay the borrowed amount and make regular interest payments. The creditworthiness of the issuer is crucial to the security of the bond, as changes in creditworthiness or insolvency could impact the bond's value.
Bonds can have different types of interest, which are called coupons. Fixed-rate bonds offer a fixed interest rate over the entire term, while floating-rate bonds are linked to a reference interest rate and are regularly adjusted to the new interest rate level. Coupons are paid on the coupon date and are calculated based on the nominal amount. Zero-coupon bonds are another type of bond that do not pay a regular coupon, and the yield on such bonds is the difference between the initial issue price and the redemption price at the end of the bond's term.
Changes in market interest rates can cause fluctuations in bond prices. Rising market interest rates can cause bond prices to fall and falling market interest rates can cause bond prices to rise, resulting in interest rate risk. Bonds can also be issued in foreign currencies, which creates an additional currency risk between the local currency and the bond currency.
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Bank bonds -
senior and subordinated bonds
Senior bonds are fixed-income securities that have a higher claim on assets in case of an issuer's bankruptcy, which makes them more secure than other bonds from the same issuer. In contrast, subordinated bonds are fixed-income securities that are of a lower rank in the event of an issuer's bankruptcy compared to senior bonds. If the issuer becomes insolvent, the holders of subordinated bonds are only paid after all senior bondholders have been compensated. The increased risk associated with subordinated bonds results in higher interest rates compared to senior bonds.
s Wohnbaubank fixed
and floating-rate bonds
There are fixed and variable interest s Wohnbauanleihen available. Wohnbauanleihen are convertible bonds, allowing investors to exchange them for participation rights in s Wohnbaubank at a later date. The proceeds from the s Wohnbauanleihen are used to finance housing construction projects in Austria. Private investors can benefit from an annual interest income of up to 4% that is exempt from capital gains tax (KESt), irrespective of the holding period or initial purchase. This 4% exemption from capital gains tax (KESt) results in a higher after-tax return compared to regular bonds with the same interest rate.
Corporate bonds
Corporate bonds are debt instruments that are issued by industrial companies worldwide to raise external capital. The main sectors include automotive, construction, financial services, energy supply, telecommunications and food. Corporate bonds can be structured in various ways, including fixed or floating rates, or with special structures, and they function the same way as other types of bonds. When assessing corporate bonds, their rating is an important criterion. Typically, a higher coupon indicates a higher probability of default.
Government bonds
Government bonds are a medium- to long-term debt instrument that can be issued by governments or public authorities to finance various infrastructure projects such as roads, railways, and education or healthcare facilities. In Austria, federal, state, and local governments issue bonds to finance long-term infrastructure projects. Austrian government bonds are gilt-edged. Governments in the international or CEE region use government bonds to finance development and infrastructure projects such as highways, port facilities or power plants. Depending on the credit rating of the country, government bonds are in general considered as safer investments compared to other issuers, as steady tax revenues are used to repay the bonds.
Product features at a glance
- Regular interest payments (except for zero-coupon bonds)
- Large selection of diverse bonds from different issuers
- Repayment at 100% of the nominal amount at maturity by the issuer
- Investments in EUR and foreign currencies are possible
- Price fluctuations possible during the term - premature sale can lead to capital losses
- Investors bear the credit risk of the issuer, i.e., the risk of changes in creditworthiness or insolvency
- The security is not covered by any deposit insurance scheme. Investors are exposed to the risk that Erste Group Bank AG may not be able to meet its obligations in the event of insolvency (illiquidity, over-indebtedness) or an official order (bail-in regime). There is a possibility of a total loss of the capital invested
- Exchange rate risk for bonds denominated in foreign currency