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Overview of the savings account and bonds investment instruments

Mar 16, 2022.

This article explains the savings account and bonds investment instruments. What do you need to be aware of when purchasing bonds and why does it make sense to diversify? And what exactly is a medium-term note? This article answers this question and explores other interesting issues.

Savings accounts: the liquid reserve

It is well known that savings accounts these days yield hardly any interest. And if you consider the account fees, the assets in saving accounts are even losing value. The big advantage offered by savings accounts is depositor protection: should a bank become insolvent, savings of up to CHF 100,000 are protected.

 

A savings account is the place to keep your iron-clad reserves. It’s for amounts that you will need in the next two to three years and for savings that you are continuously building up.

 

Generali tip: take note of your financial institution’s withdrawal conditions, as there may be a period of notice for larger amounts and a penalty (penalty interest) may apply if you do not adhere to this.

 

 

Bonds: for medium-term investments

Bonds – also called annuity certificates or fixed-income securities – are debt securities issued by companies or public authorities such as the Swiss federal government, cantons and municipalities. When you buy a bond, you are entitled to interest (coupon) from the issuer and repayment of your deposit after a certain period of time.

 

Good to know: the longer the term of a bond, the higher the average interest rate.

 

How secure is a bond?

There is no guarantee that you will get your money back at the end of the term. It could happen that the issuer becomes unable to pay. This is why creditworthiness, also known as future solvency, is a key factor to consider before investing. The creditworthiness of bond issuers is measured by rating agencies. The two best-known rating agencies are Standard & Poor’s and Moody’s. You can establish the risks of a bond using the credit ratings assigned by these two agencies.

Credit ratings and potential insolvency

Default probability of bonds depending on their rating

 

AAA 0,0% 0,1% 0,5%
AA 0,0% 0,2% 0,7%
A 0,1% 0,4% 1,3%
BBB 0,3% 1,6% 4,3%
BB 1,3% 9,4% 18,6%
B 6,7% 25,5% 36,8%
CCC 28,8% 48,8% 57,1%

Source: Standard & Poor’s

The safer the bond, the lower the interest rate

The higher an issuer’ credit rating, the lower the risk for investors – but also the lower the interest rate that the issuer has to pay to its creditors, i.e. you. And conversely, the lower an issuer’s credit rating, the higher the interest rates need to be to attract investors or encourage them to invest.

 

Good to know: You should also diversify your bond investments by buying bonds from multiple issuers and choosing different maturities. Funds suitable for bond investments are those that are to be invested in the medium to long term – i.e. around five years or more.

 

Price fluctuations during the term

If you keep your bond until the end of the term, you will get 100% of the invested capital back. However, the price may fluctuate considerably during the term and rise or fall well above or below 100%. Three factors affect the price of a bond:

  • General level of interest rates: The lower the current interest rate environment in which a bond is issued, the lower its coupon. For this reason, bonds issued a few years ago at a higher level of interest are worth considerably more on the stock exchange.
  • Credit rating of the issuer: When an issuer’s credit rating falls, the prices of its bonds also fall because the risk of bankruptcy has increased. A rise in credit rating has the opposite effect.
  • Fluctuation risks for investors: The price of a bond varies depending on the average residual term of a bond (duration) and the associated change to the interest rate.

 

Good to know: These changes in the prices of bonds are only relevant if you want to sell a bond before maturity, i.e. before the end of its term.

 

Benefit of medium-term notes

In contrast to the bonds issued by companies or public authorities described above, medium-term notes are issued by banks and Postfinance. They are not traded on an exchange and are held until the end of their term. As with savings accounts, early withdrawal triggers a penalty (penalty interest) if the period of notice is not adhered to.  The term lies between two and eight years and the interest rate is higher than with a savings account.

 

Important: the interest rates offered by various banks can vary significantly. Medium-term notes are also included in the depositor protection amount of CHF 100,000.

 

MORE ARTICLES ON THE SUBJECT

 

In our second article, we introduce you to the investment instruments equities and investment funds.

ABOUT THE AUTHOR

 

«You can reduce value fluctuations by regularly investing the same amount each month. This increases the chances of returns.» 

 

 

Raphaël Savary, Sales Manager

Raphaël Savary has been passionately pursuing his career for 13 years. He holds a Federal Diploma of Higher Education in Financial Planning and is Sales Manager at Generali in the Lausanne-Riviera region. Thanks to his holistic analytical approach and 360° view, he helps Generali clients to optimise their operations from all angles in the areas of insurance, finance and pensions.

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