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Guide to Bonds

Author
Baizat Team
Category
Investment
Tags
Stock Market, Invest, Buying, Automobile, Tips, Investment
 

Bonds may not be the most famous version of Investment; without the glamour of stocks and shares that we know so well from films and news. You won't read many stories of people who have made it rich from their bond investment, but at the same time you are far less likely to hear stories of those who have lost it all by purchasing some risky bonds.

Bonds are generally a safe and stable option for someone who is looking to put their money somewhere for small, but normally assured, returns.

Always remember that with potential rewards comes potential risk and you should always consult with a certified investment advisor before making any related decisions in your life.

How do bonds work?

how do bonds work

In the past you may have taken out a loan from the bank for a new house (mortgage) or taken a cash advance from a friend until the next pay day. These are all forms of borrowing. Most likely you will have a promise to pay back by a certain time, perhaps with profit for the party who is lending you money.

With bonds, the investor becomes the lender. In the same way that you borrow money, also Governments and Companies will need to borrow occasionally. Perhaps a Company is launching a new product that it needs funds for, or a Government is building a major bridge that requires a lot of money. The funds required in some cases can be far more than a standard bank is willing to offer, so some will decide to raise money by issuing bonds.

Investors will then purchase the bonds, together funding the needs of the organization. In return, the bond will have a set schedule of payments at a rate of interest. The interest rate is sometimes known as the "coupon". The date by which the investor will receive their payments back is known as the "Maturity Date".

Because the investor is aware of how much they will get back at what time - this is known as a ‘Fixed-Income’ security.

 

An example of bonds in action

an example of bonds at work

Below outlines a sample situation for some bonds, simply swap with your own currency for an example relating to your country:

  • You purchase a Bond valued at AED 5,000 with an interest (or ‘coupon’) of 5% and a 'Maturity Date' of 10 years.
  • You receive a yearly payment of AED 636 for 10 years (your amount is paid back in parts every year plus your interest)
  • After you have reached "Maturity Date" (10 years), you will have been paid AED 636
  • Over the 10 years you made AED 1,364 on your money
  •  

Why are bonds lower-risk than shares?

bonds normally a lower risk option than shares

If you purchase bonds, the organization is in debt to you for the agreed amount (think of you being the bank).

If you purchase shares or stock, you are becoming an owner in the organization, therefore you have voting rights and a share in their profits. The benefit being; if the company grows your share will also grow - however if the company fails, your share will fall too - there are no guarantees and a much higher risk.

As a bondholder, if anything happens to the organization you have a higher claim for the money you have lent at the agreed rate.

Of course the chances of a big return are not as high as shares or stocks, but bonds are typically a secure way of you storing some of your money over a longer term time period.

When the market is volatile and shares and stocks collapse; bonds will have a much higher chance of remaining safe.

 

Times to invest in bonds

when to invest in bonds

Every investor should keep a diversified portfolio, and bonds are often part of that. When you want to avoid risk and keep your money secure for the future, bonds can be a good choice. Below are some examples of when people may invest in bonds:

  • Money for Education (for the future plans of the bondholder or their family)
  • Money whilst Planning (for those who have cash and aren't ready to make a financial decision, it may be an option to tie it in a bond until ready)
  • Money for Retirement (as money is secured for long term periods, bonds can be ideal for retirement planning)

 

Where to buy bonds

There are many places you can purchase bonds. Saving bonds may be available in your workplace, at Government Offices and Financial Institutions in your country.

In the UAE, the National Bonds scheme is a form of Islamic Bonds (Sukook) and is not classed the same as standard Bonds (profit rates are not fixed and can vary year upon year). However they may also be an option to consider.

 

Stay Safe

We wish you all the best with your investment. Make sure to only invest money you can afford to lose, always look to diversify your investments and think long term in your goals.

As always, be sure to research thoroughly and consult with a professional before making any financial decisions in your life.

If you are unsure about an investment option, consult the relevant local Government Department in your country before making a decision.


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