Bonds

What are Bonds?

A bond is a debt security where the bond issuer issues the bond for purchase by the bondholder. It is also known as a fixed income security, as a bond usually gives the investor a regular or fixed return. Experienced investors know the importance of having a diversified portfolio to grow their wealth. Equities, properties, a variety of unit trusts funds, cash as well as bonds, should form core elements of your financial portfolio.

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Reasons to Invest in Bonds

Bonds have several benefits that make it stand out from equity focused investments, they may include:

• Lower-risk investment
  This is especially true for government bonds and investment-grade corporate bonds
  
  
• Regular cash payout
  Through coupon payments made annually or semi-annually
  
  
• Potentially higher interest rates
  Compared to Fixed Deposit rates
  
  
• Capital appreciation opportunity
  In addition to regular cash payouts
  
  
• Investment diversification
  Balance out higher-risk asset classes in portfolio

Risks to keep in mind

Before you invest, however, you need to understand there are risks involved when it comes to investing into bonds. Here are some of the key risks to consider before you invest:

• Interest rates risk: Bonds usually pay a fixed coupon. This means that a rise in interest rates generally result in bond prices falling conversely, when rates decline, bond prices rise.
• Credit risk or default risk: This is the risk that a bond issuer will be unable to make interest or principal payments when they are due.
• Currency risk (for investment in foreign currency bonds): Foreign currency investments are subject to exchange rate fluctuations which may affect, unfavourably or favourably, the effective return on the bond.
• Liquidity risk: Investors may have difficulty finding a buyer when they want to sell and may be forced to sell at a significant discount to market value. Also, most bonds are subject to a minimum transaction threshold. If your investment is less than that threshold, you will not be able to sell until and unless there are enough other investors who also want to sell.

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Useful Information

Qualified investors refer to any individual or corporation that falls under the Accredited Investors definition as specified under Section 20 of Securities Market Order, 2013 (SMO).

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