Bonds made simple: What they are, how they work and how much you earn

Bonds are no boring classic; they are a kind of investment Swiss watch. You know exactly when and how much money will come your way. If you are looking for a stable return, peaceful sleep and clear rules of the game, this article will open the door for you to a world where money works quietly – but reliably.

What is a bond and how does it work?

A bond is essentially a loan, but in the opposite direction – the state, a company or, say, a city borrows money from you, not the other way around. When you buy a bond, you give the entity in question (the so-called issuer) money for a certain period. In return, it promises to give it back to you at a set time – and to throw in interest on top of that. We call that the bond yield.

Investing in bonds is therefore often considered a calmer and more predictable way to grow your money.

To help you get your bearings on the topic easily, here are the four basic terms you are sure to come across:

• Issuer – the one who issues the bond. It can be the state (government bonds), a city, but also a large company (corporate or investment bonds).
• Nominal value – the amount the issuer returns to you at the end of the maturity. Most often it is CZK 1,000 or EUR 100 per bond.
• Coupon – the interest the issuer pays you regularly. Usually every year, sometimes even more often. The amount of the coupon affects how attractive a bond is.
• Maturity – the period for which the issuer borrows the money. It can be, say, 3, 5 or even 10 years. Once it has passed, it returns the nominal value to you.

Bonds are therefore an understandable and accessible instrument for anyone who wants to grow their finances without unnecessary stress.

What types of bonds are there?

You may be surprised by how many types of bonds there are – and how they can differ. Choosing the right type depends mainly on

• how much you want to earn,
• how much you are willing to risk and
• how long you can “set aside” your money.

Let's take a look at the most common types.

Government and corporate bonds

Government bonds are issued by the government and are among the safest investments of all. So if you are looking for stability and a peaceful sleep, they can be the ideal choice.

By contrast, corporate bonds are issued by companies, and because they carry greater risk (for example, that the company goes bankrupt), they offer a higher yield.

The general rule is:

• Government bonds = lower yield, higher certainty.
• Corporate bonds = higher yield, lower certainty.

Inflation-linked bonds

A special category is inflation-linked bonds. They adjust the amount of the yield according to what inflation is – in other words, they protect the real value of your money. That is why they are very sought after in times of high inflation.

Short-term vs. long-term bonds

We also find differences in duration: short-term bonds (e.g. for 1 to 3 years) are suitable if you do not want to tie up your money for a long time. Long-term bonds (5 years and more) often offer higher interest, but of course also greater uncertainty about what will change on the market by then.

Bonds by yield

And finally – as for the yield itself, you will come across:

• fixed-rate bonds – you know exactly how much you will receive each year,
• variable-rate bonds – the amount of interest changes according to market conditions,
• zero-yield bonds (so-called discount bonds) – they pay no interest, but you buy them at a lower price and at the end they return the full nominal value to you.

Bond yield: What really matters?

When you say investing in bonds, the first thing most people are interested in is the yield. How much does it actually “bring in”? But the bond yield is not only about the amount of interest – it is affected by many more factors. Let's go through them.

What affects a bond's yield?

The basic element is the coupon – that is, the regular amount the issuer (e.g. the state or a company) pays you. But alongside that, a role is also played by the length of maturity, the current interest rates on the market, inflation or, say, how trustworthy the issuer is.

The higher the risk (e.g. a less well-known company), the greater the yield as compensation. And vice versa.

Reading tip: Understand the magic triangle of investing 💰

How to calculate a bond's yield?

Example: You buy a bond with a nominal value of CZK 10,000 and an annual coupon of 5 %. Each year you thus receive CZK 500. If you hold it for 5 years, you earn a total of CZK 2,500 – and at the end you get your CZK 10,000 back.

In this case the bond yield is clear and predictable.

And what if you want to compare the yield with other types of investments?

Compared with stocks, bonds are more stable – but also less profitable.

With real estate investments the situation is more complicated: there the yield is a combination of rental income and the growth in the property's value. With InvestBay you can easily calculate a specific yield using our investment calculator and decide what makes more sense for you.

Bonds are not a bad choice – you just need to know exactly what you expect from them. And if you want a yield and at the same time no worries? Invest with us. With us you get a yield from both the rent and the sale of the property, and you know what you are getting into.

Register today via the button in the top right corner. It is quick and, above all, free.

Why (not) to invest in bonds?

Investing in bonds is often the first stop on the journey to financial independence – and no wonder. It offers stability, calm and clear rules of the game. But as is usually the case, even this certainty is not without catches. Let's go through when bonds pay off – and when it is better to avoid them.

Advantages of bonds

Bonds are like a comfortable train ride. You are not flying like a rocket (stocks), but you know when you will arrive and where. They are stable, fluctuate less and their yield is predictable – ideal for those who want to have a calming element in their portfolio. The regular coupon payments can, moreover, please not only beginners.

Bonds and the risks to watch out for

Even on a calm train, something can go wrong. Among the biggest risks of bonds is the so-called credit risk – that is, that the issuer will not be able to repay. With government bonds this is unlikely, but with corporate ones you already have to choose carefully.

Then we have inflation. It can erode your yield over time if you do not have an inflation-linked bond.

Last but not least, there is also liquidity – some bonds are harder to sell back when you need cash.

Government bonds: Yes or no?

Government bonds are a safe bet. It makes sense to invest in them if you are looking for calm for part of your portfolio. They are ideal for conservative investors or as short-term protection against inflation (e.g. in the form of inflation-linked bonds).

On the other hand, if you are looking for higher yields and have an appetite to take a bit of risk, then government bonds will probably not thrill you.

How to buy bonds, or buying and selling bonds step by step

Where to buy bonds

• Through a bank or a securities broker: The simplest route, especially if you already have an investment account. Banks offer both government and corporate bonds, often with higher fees.
• On the stock exchange: If you already have an account with a securities broker (e.g. Fio, Patria, Degiro), you can trade directly on the secondary market. Here you already need a bit of an overview of how the market moves.
• Through investment funds: For example, through bond funds. You do not have to deal with selecting specific bonds – the fund does it for you. The downside, however, is the fees and less control over the portfolio.
• From the issuer: For example, directly from the company that issues the bond. This tends to be typical of smaller corporate issues, often a so-called private placement.

How to sell bonds

1. Check whether the bond can be sold: With some types of bonds (especially corporate ones) a sale is only possible after a certain period, or there is no liquid market – you have to find a buyer yourself.
2. Placing a sell order: You place a sell order through your broker's trading platform. In the case of a bank, an advisor will guide you through it.
3. Ending the investment and taxation: Bond yields are subject to taxation (usually a 15 % withholding tax), and if you sell before maturity, the difference between the purchase and sale price may be a profit or a loss.

Investing in bonds as part of a portfolio

Bonds are a great fit for diversifying a portfolio. When, alongside dynamic components (e.g. stocks or real estate), you also have bonds in your portfolio, they help smooth out the swings and reduce overall risk.

What percentage of a portfolio should bonds make up? That depends on your investor profile and investment strategy.

A conservative investor may have 60–80 % in bonds, while a dynamic one perhaps only 10–20 %.

Bonds vs. real estate: Which pays off more for you?

There are various ways you can invest – but if you are weighing up either bonds or real estate, you should know their key differences. It is not just about the level of the yield, but also about how the investment behaves, what exactly you own and what risks you take on.

Comparison of profitability, riskiness and liquidity

Criterion	Bonds	Real estate (direct investment or crowdowning via InvestBay)
Profitability	Fixed – e.g. 6–10 % per year	Non-linear – grows with the property's price and the rental yield
Riskiness	Lower to medium – depends on the issuer and collateral	Medium – the property's price can fluctuate, but you share directly in its growth
Liquidity	Higher – can often be sold on the secondary market (if one exists)	Lower – you usually hold for the duration of the project
What do you own?	A receivable – you are a creditor	The property directly or a share in the property – you are a (co-)owner

Who each option is suitable for

Bonds are suitable for those who:

• want regular income right from the start,
• want a fixed yield (e.g. 7 % per year),
• do not like watching market swings,
• understand that in this model they are not investing in the property as an asset, but lending money to the developer – whether the project succeeds or not, they receive the agreed interest, but do not share in the growth of the property's value.
  

Investing in real estate (e.g. crowdowning via InvestBay) is, by contrast, suitable for investors who:

• believe in the growth of the real estate market and want to participate in it directly,
• are willing to accept lower liquidity in exchange for a higher potential yield,
• want to be a co-owner – not a creditor,
• understand that the yield is partly regular (from rents) and partly one-off (from appreciation).

InvestBay tip: Diversification as the key to success

And now the most important thing: why choose when you can have both?

Smart investors combine fixed yields from bonds (stability, regularity) with a share in the growth of real estate value (long-term growth, protection against inflation). It is precisely diversification that helps you spread risk – and maximise the potential for profit.

With InvestBay you can invest in real properties through crowdowning. Your investment grows as the property's price grows, and on top of that you receive regular rental income. Everything transparently, without the worries of tenants or maintenance.

If you believe in the real estate market and want to have a share in the growth of property values – invest directly in assets, not in other people's promises. If your goal is fixed income, a corporate bond can be a good complement – but never a full substitute.

Take a look at our current offer of properties to invest in.

👉 Register with InvestBay and start building your portfolio today.

How you grow your money smartly with InvestBay through (not only) real estate

InvestBay is a Czech online platform that lets you invest in real estate – simply, safely and without worries. Instead of lending money to developers, you become a co-owner of properties. As a result, your investment grows when the value of the given property grows.

What is InvestBay and how does it work?

On InvestBay you invest using so-called crowd-owning, which is a modern form of co-owning real estate. This means you are not buying a bond, but a real share in the property's returns. You gain a yield from both the rent and the appreciation upon sale – without having to find tenants, deal with repairs or taxes. We handle everything for you.

Reading tip: How InvestBay pays out money

Why do people choose crowd-owning?

• Your investment is backed by real property – a physical building.
• You are not a creditor, but a co-owner.
• You share in the profits from the growth of the property's price, not just a fixed interest like with bonds.
• Transparency, a Czech environment, support in Czech and zero day-to-day operations.

Yields from rent and from sale without the day-to-day operations

Each property generates rental income, which comes to your account regularly. After several years the property is sold – and the profit from its appreciation is divided among you and the other co-owners.

InvestBay takes care of the purchase, management and sale of the property. You just watch how your investment works.

From CZK 2,500, online, in Czech

You can start from as little as CZK 2,500, the whole process is online, and everything is in Czech. You have access to detailed information about each investment, including a yield calculator, an overview of investor voting and the payment history.

Choose a property from the current offer and start investing today.

Frequently asked questions

How does a bond work?

A bond is a security with which you lend money to a company or the state. After a certain period the debtor returns the principal to you and, in addition, pays you interest. You are not the owner of the company or property, you are only its creditor.

How risky are bonds?

It depends on the issuer. Czech government bonds tend to be very safe, corporate bonds (e.g. from developers) may carry a higher yield, but also a higher risk – including loss of the investment if the company goes bankrupt.

Where to buy Czech bonds?

You can buy them through:

• a securities broker (e.g. Fio, Patria),
• specialised platforms (e.g. Euronext),
• a bank,
• directly from the issuer (e.g. via developers' websites).

How do bonds behave?

Their value responds to interest rates. When rates rise, the price of older bonds falls (because they have lower interest). Moreover, they are fixed – if the price of a property or company grows, you do not get a higher yield from it. Your reward is the interest set in advance.

How much can I earn on bonds?

Usually 3–10 % per year. The higher the yield, the higher the risk. With government bonds the yield tends to be around 4 %, with riskier corporate ones up to 10 %.

Can you invest in bonds even with little capital?

Yes, some bonds (mainly corporate ones) have a minimum investment in the order of thousands of crowns. On the InvestBay platform, however, you invest directly in assets, and you start from as little as CZK 2,500 – with the possibility of the value growing over time.

What is a government bond?

A government bond is a way for the state to obtain money – and you have the opportunity to lend it. It works simply: you send the state a certain amount, and in return it promises to give it back to you in a few years along with extra interest. That interest is your earnings. Because it is the state (e.g. the Czech Republic), the risk is minimal – the state is not just going to disappear.

For beginners it is an ideal gateway to the world of investing: clear rules, low risk, a predictable yield.

How to invest in government bonds?

You can invest in government bonds quite easily – whether you are a beginner or an experienced investor. The most common route is buying through the website of the Czech Ministry of Finance, which regularly offers the so-called Bonds of the Republic. You just register, choose a specific type of bond (e.g. anti-inflation or fixed-interest) and make the payment.

Another option is buying government bonds on the secondary market through a securities broker or a bank. The advantage of these bonds is stability and minimal risk – they are, after all, guaranteed by the state. The disadvantage tends to be a lower yield, usually around inflation.