Everything You Need to Know About Bonds: A Guide for Beginners, Intermediate, and Advanced Investors

Investing in bonds can be an excellent complement to your portfolio, providing income flow and diversification. However, like any investment, it requires understanding risks, maturities, and how they work in different countries.

Bond basics

What is a bond?

A bond is a debt instrument: when you buy a bond, you are essentially lending money to an issuer (a government, a bank, or a company).

The issuer commits to repay your principal on a set date (maturity).
During the bond’s life, it pays you periodic interest, called coupons.

Risk and return

Low risk: bonds from strong governments (U.S., Germany, Japan). Very low probability of default, but low interest.
Medium risk: corporate bonds from large, stable companies (Apple, Microsoft). Higher returns, somewhat higher risk. Bonds from provincial or state governments usually carry more risk than national bonds.
High risk: bonds from small companies or unstable countries, known as “high yield” or “junk bonds.” Potentially high gains, but real risk of default.

Simple example:

Simple example: You buy a 10-year U.S. Treasury bond: you lend $1,000 and receive 3% annual interest. At the end of 10 years, you get back your initial $1,000 plus interest.

Term and liquidity

Bonds can be short-term (less than 3 years), medium-term (3–10 years), or long-term (over 10 years).
Some bonds can be sold before maturity, but their price will depend on current interest rates and the perceived risk of the issuer.

How to start

Open an account with a broker or bank.
Research your country’s laws regarding investment in domestic and international bonds.
Start with low-risk bonds to get familiar with interest and maturity dynamics.

Intermediate level: corporate bonds, strategies, and diversification

Types of corporate bonds

Investment grade: large, stable companies, medium-to-low risk. Examples: Apple, Microsoft, Coca-Cola.
High yield / junk bonds: small companies or those with liquidity issues, high risk and high return.

Strategies

Diversification: don’t invest everything in a single bond or issuer. Mix government and corporate bonds.
Duration management: choose bonds based on sensitivity to interest rate changes. Long-term bonds are more affected if rates rise.
- Long-term bonds are those with a distant maturity, typically more than 10 years. They have greater interest rate sensitivity: if rates rise, their price falls more than a short-term bond. Greater inflation risk: the money you get back in 20–30 years is worth less than today. Greater return potential: they usually pay a higher coupon to compensate for risk and term.
Hedging: use of derivatives to manage risks, for example interest rate swaps (a financial contract between two parties to exchange interest payments on a notional principal. Most common: swap fixed rates for floating rates.) or futures. This is more for advanced investors, but worth knowing about.

Bonds in different countries

Sovereign bonds: U.S., Germany, Japan → low risk.
Emerging market bonds: Brazil, Mexico, Argentina → higher risk, higher returns.
International corporate bonds: available through global brokers. Examples: Tesla, Nestlé, Samsung.

Note: always check local laws, tax withholdings, and foreign investment regulations.

Advanced level: derivatives, hedging, and sophisticated trading

Bonds and derivatives

Bond futures: contracts to buy or sell a bond in the future, used to speculate or hedge positions.
Bond options: the right to buy or sell bonds at a certain price before a date.
Interest rate swaps: contracts to exchange fixed-rate payments for floating-rate payments, or vice versa.

Inverse and leveraged bonds

Some ETFs or funds use leveraged or inverse bonds, which multiply returns or aim to profit when prices fall.
Very high risk, only recommended for professional traders.

Hedging strategies

Covered bonds: bonds backed by specific assets, less risky than regular corporate bonds.
Global diversification: mix bonds from different countries, currencies, and interest rate types.

How to choose a bond

Reliable issuer: government vs. company.
Credit rating: agencies like Moody’s, S&P, and Fitch.
Term: short, medium, long.
Currency: exchange rate risks if in foreign currency.
Yield: annual interest or coupon, compared to the risk taken.

Conclusion

Bonds offer stable income and diversification, but with different levels of risk depending on issuer, country, and term.
Beginners should focus on low-risk sovereign bonds and learn the mechanics of interest payments and maturities.
Intermediate investors can include corporate bonds and global diversification strategies.
Advanced investors can explore derivatives, hedging, and leveraged bonds, always managing risks.

It’s very important to diversify your portfolio to do it well—revisit the oracle to find out what else to invest in and how to do it right.

Glossary

Blue chips: established companies with decades of existence, billions in revenue, product diversification, consistent profits, cash reserves, and if they need financing, banks and markets lend to them because they trust their solvency.

Broker: a platform or financial intermediary that allows you to buy and sell stocks. Some brokers are international (e.g., Interactive Brokers, eToro), and others are local (depending on the country).

Call: a financial contract known as a derivative, whose value depends on a stock. It is the right to buy a stock at a certain price in the future.

Cap rate: capitalization rate, an indicator of the annual return of real estate investment.

Cash flow: monthly cash generated by the property after expenses (rent – taxes – maintenance).

Certificates of Deposit (CDs): "similar to fixed-term deposits, but usually issued by banks or financial institutions in more formal or international markets. They allow investing in local or foreign currencies. They may have fixed or variable interest options, depending on the contract.

Commodities: any basic, homogeneous, tradable product produced in large quantities and traded in global markets. They are used both for direct consumption and for industrial production.

Covered Call: investors holding stocks who sell “Call” options to generate extra income.

Covered bonds: bonds backed by specific assets, lower risk than regular corporate bonds.

ETF: an investment fund traded on the stock exchange like a stock.

Fixed-term deposits: depositing money in a bank for a set period in exchange for a fixed interest rate. At the end of the term, you recover your capital plus interest.

Futures contracts: agreements to buy or sell a certain quantity of an asset at a fixed price in the future.

Hedging: investing in stocks of other types such as precious metals or utilities to balance losses if company stocks fall.

High yield / junk bonds: small companies or those with liquidity problems, high risk, and high return.

Interest-bearing accounts: bank accounts that generate daily or monthly interest on the available balance.

Interest rate swaps: a financial contract between two parties to exchange interest payments on a notional principal. The most common swap is exchanging fixed rates for variable interest rates or futures.

Inverse ETFs: gain value when the index they track goes down.

Joint ventures: partnerships between two or more parties to develop a joint project, sharing risks, costs, and profits.

Leverage: using financing (mortgage or loan) to buy more properties than your capital would allow.

Leveraged ETFs: multiply market movements (2x or 3x), up or down.

Liquidity: in economics, liquidity is the ease with which an asset can be converted into cash without losing value.

Microcaps: very small cryptocurrencies by market cap since they are new or unknown projects. They have the potential to multiply by 100 but also the risk of disappearing overnight.

Mining (Bitcoin): using computers to validate transactions and earn rewards. Miners compete, consume electricity, and receive rewards in BTC.

Mutual Fund: a collective vehicle where multiple people contribute money that a professional manager invests in different financial assets: stocks, bonds, commodities, or a combination of them.

Net Asset Value (NAV): the price of each unit, which fluctuates according to the value of the mutual fund’s assets.

Offshore accounts: accounts opened in another country, used by some investors to access products not available locally or for tax advantages. It’s legal if declared, but each country has its own regulations.

Portfolio: the total set of financial assets (such as stocks, bonds, mutual funds, or real estate) owned by an investor or entity, aimed at achieving financial goals through diversification and risk management.

Put: a financial contract known as a derivative, whose value depends on a stock. It is the right to sell a stock at a certain price in the future.

REITs (Real Estate Investment Trusts): real estate funds that allow investing in large portfolios without directly buying property. They are traded through brokers like regular stocks, and there are even REIT ETFs.

Staking: some blockchains (Ethereum, Cardano, Solana) allow you to “stake” your coins on the network and earn interest. This generates passive income similar to a fixed-term deposit, but with more risk.

Unit share: when you contribute money to a mutual fund, you receive “units” representing your proportional participation in the portfolio.

Validation (Ethereum and other proof of stake): locking large amounts of coins to maintain the network and receive rewards.