SimplyFinance - Bonds

The Pros and Cons of Bonds

2007-08-05T23:00:00Z

There are several advantages to bonds. They are typically less risky than investing in stocks or equity. They can also provide a good, stable income through the interest payments. Many experts suggest investing in bonds if you are looking for steady interest income but have less tolerance for risk than typically associated with investments made in the stock market.

Examples of scenarios where investors may choose to invest in bonds:

A young investor that is aggressive in his investments may have the large majority of their investment funds in the stock market (equity investments) because they have a long investment time line, and they can bear the risks associated with these types of investments (and the likely rewards due to average returns being around 10%). However, this type of investor may want to put a small amount of their investment into bonds (say 10%) to diversify their portfolio and mitigate risks.
As investors get older and are more dependent on their savings accounts for their future wellbeing, they may put a larger amount of their investment portfolio into bonds (perhaps 50% or higher).
An investor that has a large sum of money that they want to live off of and who does not expect to make significant additional income from other sources may invest in stable bonds to provide a steady income through the bond interest.

However, there are still risks associated with bonds. These risks mainly arise from the fact that the entity that issued the bond (whom you make the loan to) may not be able to pay the interest rates due to you or may not be able to pay back the nominal value. This is typically referred to as the bond "going bust." This risk varies depending on the type of bond you invest in. Government bonds, or gilts, tend to be the most stable and many are virtually guaranteed.

Corporate bond risk is associated with the stability of the company. If you believe the company is a strong, stable company with very little risk of incurring financial ruin, then the risk associated with the bond is typically less. If the corporate bond is with a less stable or less proven company, then the risk is typically higher. Interest rates tend to follow the credit rating of the companies that issue the bonds. In general, with higher risk comes higher interest rates. Ultimately, you want to find a good stable bond with as high an interest rate as possible.

There are also bond funds that invest in multiple bonds. The benefit of these is that they spread the risk over several bonds and therefore diversify your investment and mitigate risk.

If you'd like to discuss the possibility of investing in a bond, fill out our short form, and one of the specialists here at SimplyFinance will put you in touch with an investment advisor who will be able to answer all your questions about bonds. If you decide that a bond is right for you, the same investment advisor will search the market for the bond that best suits your financial goals and circumstances.

CLICK HERE TO APPLY FOR BONDS TODAY!

The Basics of Bonds

2007-08-05T23:00:00Z

The simplest way to think of a bond is a loan. When you invest in a bond you are making a loan to (typically) the government, a local authority or a company. Then, whoever you loaned the money to (the bond) will pay you the interest on the loan. Usually bonds have a term life of less than 10 years (meaning the bond will be repaid to you within 10 years). The amount of money that will be returned to you is referred to as the "nominal value."

Bonds may be referred to as loan stock, fixed interest, gilts (when a loan is made to the government), corporate bonds (loans made to companies) and debt securities.

Most people invest in bonds to receive relatively stable and conservative regular income. However, bonds are not best for people that are seeking more aggressive capital growth.

Bonds are traded on the bond market and their prices may vary. For example, say you purchase a fixed interest rate bond for £100 and the interest rate is at 8.5%. If the market interest rates fall below 8.5% this will become a very strong investment and therefore the bond may be valued at £120 or £125. Or if interest rates rise above 8.5% than the value of the bond could decrease. If you invest in a corporate bond and the credit rating of the company you invested in falls or rises (meaning the risk associated with that bond or "loan" rises or decreases) then you could expect the market price of the bond to follow along with this change in risk.

If you want to buy bonds directly, you can do this through a stockbroking firm; you will pay charges for this similar to buying shares. Alternatively you can buy bonds through a pooled investment.

If you wish to speak with someone about investing in a bond, fill out our short form, and a SimplyFinance representative will connect you with an investment advisor that will answer any questions you have, and they will also search the market to find the best bond for your particular financial goals and circumstances.

CLICK HERE TO INVEST IN BONDS TODAY!

Understanding Bonds

2007-08-04T23:00:00Z

There is a broad range of bonds available to investors ranging from very simple financial instruments to extremely complicated and complex bonds. However, a simple way to understand the fundamentals associated with bonds is to look at their defining characteristics, mainly maturity, origination, structure, form and legal characteristics.

"Maturity" can be thought of as the life of the bond, similar to the "term" of a loan. Some bonds have maturity periods of less than a year while other have maturity periods of 15 years or more. A typical bond maturity rate is around 10 years.

"Origination" refers where the bond was issued. A Domestic Bond is issued in the local currency, and it's offered to local investors. Foreign Bonds are offered to other countries, outside of the issuers country, and are issues in the currency of country in which they are issued. There are also some bounds, such as Eurobonds, that are marketed internationally, and they are issued in a currency that differs from the country in which they are issued.

The "Structure" of bonds can vary from fixed rate, floating rate, zero coupon and other more complex instruments including index-linked bonds and asset-backed bonds.

"Form and Legal Characteristics" refer to the rights associated with a bond. Bonds may be registered as bearer bonds, and typically the rights associated with these bonds are fully transferable and negotiable.

Deciding what type of bond to invest in may be a complicated decision. To get help making this decision, fill out our short form, and one of SimplyFinance's specialists will review your information and match you with a bond advisor that will speak with you and then search the market to find the best bond deal for you.

CLICK HERE TO CONTACT AN INVESTMENT ADVISOR TODAY!