Investing for Beginners .EU, investing

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Investment in Bonds

Debt (fixed income) securities

Bonds are fixed income securities and the principle of them is simple - the issuer of the bonds attracts the money from the investors and commits to pay back for the investors until end of the period more money than they have invested.

 

Investing in stocks looks more popular than investing in bonds, but in fact the bonds gets bigger slice of total investment funds in the world (the proportions fluctuate over time).

 

Investing in bonds is more predictable because the return of investment is already known from bond yield (if bond will not default) even before the deal is made. This bond yield reflects the expected annual return from the investment including change in the price of bonds until maturity and bond coupon payments. The higher the yield,  the better bond is for investing, if not to mention the risk.

 

An investor may not receive the awaited return from the bond if the company will be short of financial possibilities for redemption of the bonds. A default of the bond would mean company‘s bankruptcy or situation close to that (restructuring or etc.) At the case of the default investors still can get back some of the invested funds, but there will be losses inevitably.

 

Interests of the bonds can fluctuate very widely and would depend on the current market situation and characteristics of the bond. If interest rates in the market are growing up then as a result value of before issued bonds falls down.

 

Typically bonds can be issued by companies, governments, municipalities. Their safety level depends on the publisher's reliability, which is measured by credit rating. If the rating does not exist (not all the companies are rated, because it is quiet expensive and not all smaller companies can afford it), then is more difficult to measure the risk of such bond. Usually government bonds are the safest category of fixed income investments, but risk of government bonds can be very different. The best ratings have big developed countries with low Debt/GDP ratio and good fiscal situation.

 

Convertible bonds are less common type of security. Bond of this kind has a debt security and equity features. Convertible bonds can pay coupon as ordinary bonds, but before or at the redemption term, investor can request to convert bonds into the shares of the company at a predetermined ratio.



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