🟢 How Lending Money Generates Returns
Bonds are one of the most widely used investment instruments in the world. They work differently from stocks — and understanding that difference helps clarify when and why they might be appropriate in a portfolio.
What a Bond Is
When governments or companies need to raise money, they can borrow it from investors by issuing bonds. A bond is essentially a loan agreement — you provide the capital, and in return you receive regular interest payments over a defined period, plus the return of your original amount at the end of the term.
Unlike stocks, where returns depend on business performance, bonds have agreed terms set in advance. You know the interest rate, the payment schedule, and the repayment date before you invest.
How Bonds Work in Practice
Consider a bond with the following terms:
| Term | Value |
|---|---|
| Principal | 100,000 THB |
| Annual interest | 3% per year (3,000 THB) |
| Term | 10 years |
Each year you receive 3,000 THB in interest before tax. In Thailand, a 15% withholding tax (450 THB) is deducted from bond interest, so you receive 2,550 THB per year. At the end of the ten-year term, you receive your original 100,000 THB back — provided the issuer remains solvent throughout the period.
- Total interest over ten years: 30,000 THB before tax / 25,500 THB after withholding tax
- Total returned at maturity: 100,000 THB
The withholding tax can be treated as final. If your personal tax rate is below 15%, you can include the interest in your annual tax return (PND 90) and reclaim part of it. Gains from selling a corporate bond before maturity are also taxable.
This predictability is one of the main reasons bonds are used — particularly by investors who need stable, regular income or want to reduce overall portfolio volatility.
Who Issues Bonds
Governments issue bonds to fund public spending, infrastructure, and national debt. Thai government bonds, issued by the Ministry of Finance, are generally considered lower risk because the probability of the government defaulting on its debt is relatively low. Foreign government bonds, such as US Treasuries, add currency risk for investors in Thailand — and for Thai tax residents, foreign income earned from 2024 onwards is taxable when it is brought into Thailand.
Companies issue bonds to raise capital for business purposes. Corporate bonds typically offer higher interest rates than government bonds — reflecting the higher risk that a company may be unable to repay.
The higher the interest rate a bond offers, the higher the risk generally associated with it. This is a direct application of the risk-return relationship.
What Influences Bond Prices
If you hold a bond until its maturity date, price fluctuations during the term are less relevant — you receive the agreed interest and your principal back regardless.
However, if you need to sell a bond before maturity, the price you receive in the market will vary based on current interest rates.
When interest rates rise, existing bonds with lower fixed rates become less attractive — their market price falls. When interest rates fall, existing bonds with higher fixed rates become more valuable — their market price rises.
This relationship between interest rates and bond prices is one of the more counterintuitive aspects of bond investing — but it is important to understand if you plan to sell before maturity.
The Risks of Bonds
Bonds are generally considered lower risk than stocks — but they are not risk-free. The main risks include:
- Default risk — if the issuer cannot repay the loan, investors may lose some or all of their investment. This risk is higher with corporate bonds than government bonds, and higher with lower-rated issuers.
- Interest rate risk — rising interest rates reduce the market value of existing bonds. This matters if you plan to sell before maturity.
- Inflation risk — if inflation is higher than a bond’s interest after tax, your money does not grow in real terms. Example: a bond paying 1.8% per year leaves 1.53% after the 15% withholding tax — less than an inflation rate of 2%, the midpoint of Thailand’s 2026 inflation forecast (Bank of Thailand target range: 1–3%).
- Liquidity risk — many corporate bonds trade only rarely in the Thai secondary market. If you need to sell before maturity, you may not find a buyer quickly or may have to accept a lower price.
Bonds and Portfolio Construction
Bonds are rarely used in isolation. Their primary role in most portfolios is to provide stability and reduce overall volatility — particularly when stock markets experience significant declines.
A portfolio that holds both stocks and bonds will typically be less volatile than one that holds only stocks. The trade-off is that expected long-term returns may be lower, since bonds generally offer lower returns than stocks over time.
The appropriate balance between stocks and bonds depends on individual goals, time horizon, and tolerance for short-term fluctuations.
Key Takeaways
- A bond is a loan — you lend money to a government or company and receive interest in return
- Terms are agreed in advance — interest rate, payment schedule, and repayment date
- Holding a bond to maturity returns your principal, provided the issuer remains solvent
- Higher interest rates on a bond generally indicate higher risk
- Key risks include default, interest rate movements, inflation, and liquidity
- Bonds are typically used to provide stability and reduce volatility in a diversified portfolio
- In Thailand, bond interest is subject to 15% withholding tax
Frequently Asked Questions
Are government bonds safe?
Government bonds from financially stable countries are among the lower-risk investments available — but they are not entirely risk-free. Inflation, interest rate changes, and in rare cases sovereign default can all affect returns.
What is a bond rating?
Credit rating agencies assess the financial strength of bond issuers and assign ratings — from high-grade (low risk) to speculative (high risk). These ratings provide a useful starting point for evaluating the risk associated with a specific bond.
Can individual investors buy bonds in Thailand?
Yes. Thai government retail bonds are issued by the Ministry of Finance; the Bank of Thailand acts as registrar. They are sold via the government bond wallet in the Pao Tang app from 100 THB, and through banks and securities companies from 1,000 THB. The current retail series can also be traded through a securities account like shares. Corporate bonds are available through regulated brokerage accounts, but some issues are offered only to institutional or high-net-worth investors who meet SEC criteria — this also applies to secondary-market purchases. Before investing, the prospectus, factsheet and credit rating can be checked on the SEC website or in the SEC Bond Check app.
→ Read next: Real Estate Investing Basics — What You Need to Know Before You Start