What Are Bonds and Bills?

Bonds and bills are securities that a government or a company issues in order to borrow money. An investor who buys one has, in effect, lent money to the issuer for a fixed term. In return, they expect to receive their principal plus a predetermined interest at maturity. A bond is therefore a debt note that says, in essence, "I will pay this amount on this date."

The difference between a bill and a bond

The basic distinction is maturity. Debt instruments with a maturity shorter than one year are called bills (bono), while those with a maturity of one year or longer are called bonds (tahvil). The mechanics are the same; only the length of the loan differs. A short-dated bill is usually less affected by changes in interest rates than a long-dated bond, because your money is tied up for a shorter time. If you need cash before maturity, a debt instrument can be sold to other investors in the secondary market; in that case the amount you receive is no longer the fixed figure due at maturity but that day's market price.

Who issues them: the state and the private sector

Debt instruments are grouped by their issuer:

• The state (the Treasury): in Türkiye these are the debt securities issued by the Ministry of Treasury and Finance. Those with a maturity under one year are Treasury Bills, and longer ones are Government Bonds; together they are known as Government Domestic Debt Securities (DİBS).
• The private sector: these are corporate bonds issued by companies. They generally promise a higher interest than government debt, because of the higher credit (non-payment) risk described in the next section.

Coupon or discount?

The interest on a debt instrument can be paid in two ways:

• Coupon-bearing: interest payments called coupons are made at regular intervals over the life of the bond (for example every six months), and the principal is repaid at maturity.
• Discounted (zero-coupon): the security is sold below its face (par) value and repaid at par at maturity. The difference is the investor's return. Short-dated bills are usually issued at a discount.

Why do price and yield move in opposite directions?

This is the most important thing to grasp about the bond market, and it is a structural relationship. The amount a bond will pay at maturity is fixed. When market rates rise, newly issued bonds start to offer higher interest, so your older, lower-rate bond becomes less attractive; if you want to sell it, you will only find a buyer at a lower price. Conversely, when market rates fall, your higher-rate bond becomes more valuable and its price rises.

In short: if the market rate rises, the price of an existing bond falls; if the market rate falls, its price rises. This price movement is more pronounced for longer-dated bonds. So a bond held to maturity delivers the return in its contract, but one sold before maturity can produce a gain or a loss at that day's market price.

Maturity and non-payment (credit) risk

Debt instruments carry two main risks. The first is the interest/price risk described above; the second is credit risk, the chance that the issuer cannot pay at maturity. A state's likelihood of defaulting on debt in its own currency is generally regarded as lower than a company's, which is why corporate bonds offer higher interest in exchange for that risk. No debt instrument is truly risk-free, because repayment depends on the issuer's ability to pay.

How funds use bonds and bills

Instead of buying bonds and bills one by one, investing in a fund made up of these instruments is a common route. In Türkiye, debt-instrument funds (bond-and-bill funds for short) allocate a large share of their portfolio to these securities; the relevant SPK regulation defines a minimum portfolio ratio (as a rule at least 80%) for such fund types. Money market funds, by contrast, work with low-risk, very short-remaining-maturity debt instruments and tools such as repo. Funds focused on foreign-currency government bonds, the eurobond funds, form a separate category. For those seeking investments consistent with interest-free (participation) principles, the counterpart of the bond-and-bill is sukuk, which rests on an asset or income stream rather than interest. The advantage of investing through a fund is that, instead of being tied to a single security, it spreads risk by holding many debt instruments across different issuers and maturities; the valuation of the securities and the tracking of their maturities are also handled by the fund.

In short, bonds and bills are the basic building block of fixed-income investing: they define whom you lend to, for how long, and what you expect in return.