Revealed: The truth about investing in bonds

Fsp Invest Team, 27 May. 2013

Tags: bonds, investing in bonds, benefits of investing in bonds, creating a balanced portfolio, portfolio management, financial instruments



To be a successful investor, you need to diversify your portfolio by including other categories of asset and investment types as well. And one of the financial instruments available for you to create a balanced portfolio are bonds. Read on to discover the basics of bonds and what they can do for your portfolio…


In today’s marketplace, there’s a wide range of financial instruments you can use to create a balanced portfolio. And bonds form part of these instruments.
 
While the total market value of the bond market is far greater than the market value of the stock market, “bonds are one of the often neglected areas of personal investment portfolios,” says Gareth Stokes author of Fear, Greed and the Stock Market.
 
Your understanding of this form of financial instrument will be greatly advanced if you get the basic concept right.
 
Here’s what you should know about bonds before you consider including them in your portfolio.
 
The facts about bonds
 
In South Africa, bonds are regulated by the Bond Exchange of South Africa (Bondex). This exchange is responsible for the regulation and trade of bonds registered in the domestic market. These bonds are mainly issued by government or by larger South African listed companies.
 
Bonds are classified as fixed income securities because they impose fixed financial obligations on the issuer. This means, “the person raising money by ‘selling’ these bonds won’t only be paying you a fixed amount of interest, but will have to repay you the amount you loaned them too,” explains Stokes.
 
Essentially, when you ‘buy’ a bond, you’re acting as a bank. You’re agreeing to lend money to a government (or a company in the case of corporate bonds) in return for a certain fixed amount of interest.
 
Here are the four key concepts you need to know about bonds:
 
1.    The coupon is the interest rate that you (the investor) will receive for the duration of the bond issue. This is also known as the “Interest income” or “nominal yield”.
 
2.    The maturity is the number of years before a bond expires. Most bonds have a single maturity date and are known as term bonds.
 
3.    The principal value is the value of the original obligation (also called the par value). “This is the amount you would have paid if you took up the bond at the date of issue. It isn’t the same as the current market price of the bond,” explains Stokes.
 
4.    There are various types of ownership for bonds, either bearer bonds or registered bonds. The only difference is, that with the bearer bond, the issuer keeps no record of ownership.
 
There you have it. Bonds: Another financial instrument you can use to create a properly balanced portfolio.

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Comments
1 comments



J Botha 2013-06-08 12:21:59

This sound good, but at what interest rate are we looking at?
Where do you take it up and at what cost?
This is a new concept for me and I would like to understand this from ground level.