What are bonds and how do they work?

If you have ever wondered where to put your money so it works harder than a savings account, yet without the volatility of the stock market, bonds may be an attractive alternative.

Most people associate investing with stocks, but the bond market is actually even larger. According to SIFMA data, the global bond market reached approximately $140 trillion in mid-2024, while the equity market stood at around $115 trillion, meaning bonds exceed equities by over 20 %. Yet many investors know surprisingly little about this market. In reality, bonds are a straightforward instrument accessible to ordinary investors starting from low entry amounts.

What is a bond and how does it work

A bond is essentially a confirmation of a loan. When you buy a bond, you lend money to its issuer (emitent), and the issuer commits to repay it at an agreed time together with a return. It is an alternative to a bank loan, with the difference that in this case the lender is you, not the bank.

Bonds can be issued by:

•  Governments – to finance public budgets and infrastructure 

• Municipalities – to finance local public projects 

• Corporations – to develop business or finance specific projects

Every bond has several basic parameters you should know:

• Face value (par) – the amount you receive at maturity

• Yield (coupon) – the interest the issuer pays you for the borrowed funds

• Maturity – the date of face value repayment

• Issuer – the entity that borrows financial resources from investors

Types of bonds

Government bonds

Considered the safest form of bonds because they are backed by the state and its tax revenues. Government bond yields depend on current market conditions and are typically lower than corporate bonds. Risk is low, but so is the return.

Corporate bonds

by companies and corporations. Since the risk of default is higher than with the state, they generally offer investors a higher yield. On the Slovak market, many issues lack an official rating, which is why it is important to carefully assess the financial health of the issuer.

Project bonds

A specific type of corporate bond where the raised funds are tied to a concrete, clearly defined project. The investor knows where the money goes and what real assets stand behind the investment. This is exactly the type of bond offered by Sympatia.

Coupon bonds vs. zero-coupon bonds

A traditional coupon bond pays interest to the investor on a regular basis, for example once a year. If you hold a bond worth €1,000 with a 7 % coupon, you receive €70 every year, and at maturity the original €1,000 is returned.

A zero-coupon bond is purchased at a price lower than its face value. It does not pay regular coupons during its lifetime, and at maturity the investor receives the full face value. The difference between the purchase price and the face value represents the yield.

Because the interest is not paid out periodically, it remains part of the investment and continues to accumulate. This creates a compounding effect, which may increase the total return over a longer investment horizon.

If you invest a larger amount and achieve a higher return, you do not benefit solely from the difference in the interest rate. Your capital grows faster, and through compounding, the interest itself begins to generate additional returns. The higher the initial investment, the greater the potential effect of compounding.

Yields and risks of bonds

Every investment carries a certain degree of risk. With bonds, it is important to understand several key factors.

Yield-risk relationship

As a general rule, the higher the promised yield, the higher the risk. More conservative government bonds typically offer lower returns than corporate or project bonds.

Credit risk

The risk that the issuer will be unable to meet its obligations to investors. It is therefore important to assess the issuer's financial results, business model, history, and assets.

Interest rate risk

When interest rates in the economy rise, the prices of existing bonds on the market fall (and vice versa). However, this risk primarily concerns investors who want to sell a bond before maturity. If you hold it to maturity, you receive the agreed yield regardless of rate movements.

Inflation risk

If inflation exceeds the bond's yield, the real value of the investment declines. For example, with a 3 % yield and 4 % inflation, you nominally achieve a return, but the purchasing power of your money decreases. It is therefore important to factor inflation into investment decisions.

Liquidity

Not all bonds can be easily sold at any time. For less liquid issues, selling before maturity may take longer or occur at a different price than the investor expects. However, for an investor planning to hold the bond to maturity, this factor typically does not represent a significant issue.

How to choose the right bond

When selecting a specific bond, we recommend looking at:

• Issuer's financial health

• Assets and economic background of the issuer

• Investment horizon

• Adequacy of yield relative to risk

• Diversification of portfolio – never put all your money into a single bond or a single issuer

Where your money goes

Proceeds from the bonds are used exclusively for the construction and operation of industrial and logistics halls in Croatia and Slovenia, regions with growing demand and EU/NATO membership. See our current projects.

Tenants include: Bosch, DHL, DSV, Electrolux, Kuehne+Nagel, Maersk, Orbico and Phoenix Group.

What underpins the investment value?

According to data provided by the issuer, the value of the real asset portfolio significantly exceeds the total value of the bonds issued. Long-term lease agreements with international companies generate stable cash flow, which is used to meet the issuer’s obligations to investors.

The value of the assets is more than three times the total value of the bond issue.

Who May Project Bonds Be Suitable For?

LSH project bonds may be suitable for investors who:

• Have the necessary knowledge and experience and understand the associated risks

• Want to invest in specific projects

• Prefer investments backed by real assets

• Have an investment horizon of at least 4–5 years

• Are seeking returns that exceed inflation and those offered by term deposits

Depending on their risk tolerance, many investors combine project bonds with government bonds or equity ETFs.

More information about current bond issues, their terms and risks can be found on the project bonds page.