Bonds: A Safe Investment for Portfolios

Bonds are often considered safe investments, offering stable returns and relatively low risk compared to stocks. As debt instruments, they allow issuers, whether governments, local authorities, or companies, to raise funds from investors in exchange for regular interest payments and repayment of the principal at maturity. Since the issuance of the first government bond by the Republic of Venice in 1157, bonds have played a crucial role in financing public and private activities. This article explores the characteristics of bonds, how they work, and their role in diversifying investment portfolios.

What is a Bond?

A bond is a debt security representing a loan given by an investor to an issuer. In return, the issuer agrees to pay interest (called coupons) at regular intervals and to repay the borrowed amount (the principal) at the bond's maturity. For example, a bond issued by the French government with a face value of €1,000, a 2% coupon, and a 10-year maturity will pay the investor €20 per year for 10 years, with the repayment of €1,000 at maturity.

Why are Bonds Considered Safe Investments?

Bonds are generally considered less risky investments than stocks for several reasons:

• Income Stability: Bonds offer regular interest payments, providing a stable income source for investors.
• Priority in Case of Liquidation: In the event of the issuer's bankruptcy, bondholders are repaid before shareholders, reducing the risk of capital loss.
• Lower Volatility: Bond prices are typically less volatile than stock prices, making them an attractive choice for cautious investors.

Examples of Bond Investments

In 2024, the French government issues a new series of 10-year OAT (Obligations Assimilables du Trésor) bonds with an interest rate of 1.5%. An investor who buys these bonds for €10,000 will receive €150 per year for 10 years, with full repayment of the capital at maturity.

Laws Regulating Bonds

In France, the issuance and trading of bonds are governed by the Monetary and Financial Code, in particular by articles L. 213-1 and following. These provisions regulate the conditions of issuance, the obligations of the issuer, and the rights of bondholders. Additionally, government bonds are issued in accordance with the annual finance law, which authorizes the government to raise funds through debt securities.

Conclusion

Bonds are a key element of any diversified portfolio, offering a combination of security and stable returns. They are particularly suitable for investors seeking regular income with moderate risk. However, it is important to understand the characteristics of each bond, including the issuer's credit risk and sensitivity to interest rate fluctuations. By integrating bonds into your portfolio, you can improve the stability of your investments while maintaining an attractive return potential.