If you’ve ever asked yourself how you want to make more money, then you’ve probably had the answers like stocks, small businesses, and bonds. All of which have a difference in terms of the capital, the risk management, and how the specific investment is. Bonds is actually one of the investments where the least risk is seen.
Whether it’d be investing in bonds, the stock market, putting up your small business, crowdfunding, whatever it is, an investment is nowadays the key for you to reach success. Working hard, apparently, has already been out of the topic. This is why in this specific article, we will give you a detailed explanation on bonds.
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In this article, we will be giving you the idea on what bonds are, why it’s deemed as an investment with the least risk, and how you can invest on bonds.
What are bonds?
If we are going to take the definition of bonds from the perspective of investing, then you might be confused and can just have a totally whole different idea on what it is. So, to put it in the simplest way possible, bonds can be regarded as debt obligations.
It is an amount, a long-term agreement of lending between a specific lender and a borrower. It is a type of a loan made to corporations and the national government. A bond is a big loan and the profit you gain is fixed and will depend on the key terms or the agreement the borrower has with the lender.
The terms you need to understand to help you understand bond investments more:
- Par value — the capital or the value of the bond. In simpler terms, this is what you will be investing or what the lender will lending the borrower.
- Maturity Date — the specific date when the issuer or the borrower returns the capital (par value). The date when you get back the money you invested.
- Coupon/Coupon rate — the amount or the interest that the bond issuer will receive from the borrower (the amount you will earn as profit aside from the par value).
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Who offers bonds?
As mentioned above, bonds can be given by large organizations, corporations, even the national government. Institutions who have large enough assets to share can issue bonds.
How do you make profit investing in bonds?
There actually are two (2) ways on how you can make money by investing in bonds. In your agreement with the lender, there will be a specific maturity date when you can collect full capital plus some interests in the process—that’s the first way.
The second (2nd) way, however, is to sell the bonds is to sell them at a price that’s higher when you paid for it initially. In other words, you can treat it as a stock where you sell it higher than what you’ve bought it for.
Would investing in bonds considered as a safe investment?
Well, we all know that investing itself is already a risk. However, bonds hold a safer way of investment because it is considered as a fixed-income type of profit. It’s more predictable which, in turn, has high chances of letting you earn lower than you would be getting if you invest in stocks.
Thus confirming the formula lower investment = minimal risk.
How do I get earnings from the investments I made with bonds?
This will solely depend on the arrangement you have either with a private corporation or a government institution. You can withdraw earnings semi-annually or quarterly through coupons. Then, you have the option to reinvest these to gain more profit.
Let’s have the DoubleDragon Properties Corp. (DD) as an example. They need a total of P20 billion in order for them to fund their projects. For them to be able to raise that amount of money, they decided to sell corporate bonds to the public. They will have a coupon rate of eight (8) percent per annum and a maturity date of ten (10) years.
Say for example, you decide to invest P100,000.00 on this bond, you will earn a clean P80,000.00 from your investment. Take note, though, that this amount is before taxes.
Because it’s 8 percent per annum, P8,000.00 is the eight percent of the initial capital you invested (P100,000.00). Again, you can get this either annually or semi-annually. On the 10th year, DD will return the principal amount of your investment which is P100,000.00 to you.
What risks are there?
Although we mentioned that investing in bonds can be less risky, there also are things that most people don’t understand. It’s just deemed as less risky because risk does not necessarily mean that what you invested will be gone.
When the corporation decides to terminate the bond sooner
In the example above, DD has the agreement or the term of the bond to ten (10) years. If they decide to pre-terminate the bond, they can pay back everything in five (5) years instead of ten (10). This makes the coupon rates less, thus, your earnings less.
Another thing is that DD can decide to decrease the interest or the coupon rate from eight (8) percent to just five (5) or six (6) percent. When this happens, though, bondholders will be shown the option to get the par value if they don’t want to push through with the new rate or agreement the corporation has.
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The only real risk in investing in bonds in the context of the investor losing money is when the company goes bankrupt. In the case that this happens, the investor will still be able to get a portion of the investment only when the assets of the company goes liquid.
Government bonds risks
The government has the least risk in bond investments. Why? Because the Philippine government can just increase the taxes for them to be able to pay bond or debt obligations. More so, the Central Bank can easily print more money.
This is one reason why Retail Treasury Bonds (Government bonds) are more popular and bought that corporate bonds because they have little to zero risks.
Invest in bonds—how to?
Corporate bonds would require you to do necessary research. You can ask the Investor Relations Department or the Treasury of the department to ask if they are offering bonds. NOTE: Try to mention long-term commercial papers because they might understand it more. Alternatively, you can research websites of these corporations and see if they offer bonds.
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Government bonds, however, requires less work and effort. You can proceed to any commercial bank and inquire whether or not they offer or sell Treasury Bonds. You can check the website of the Bureau of Treasury and check for offers.
Bond funds is a type of fund which primarily is invested in other debt instruments and bonds. The type of debt the fund will put their money in will be dependent on the focus. However, these investments may include municipal, corporate, convertible, and government bonds.
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These type of bonds can be gotten from banks through what they usually call a Unit Investment Trust Fund (UITF); and/or through mutual fund companies. One example would be BDO’s Easy Redemption Plan (ERP).
Are bonds connected to the stock market?
Definitely, no. Bonds and stocks are two separate entities. However, an investor can be diversified by purchasing stocks and bonds simultaneously, thus, widening his or her portfolio.
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Since bonds are not based on stocks or the value of a specific company, the corporation or whoever the institution who will be needing investors is, the quality of the bonds would depend on the risk quality of the organization or corporation. In order for a specific company or organization to attract investors, they would have to offer higher interest rates. On the other hand, they can maintain a low interest rate if the risk quality of the company is at its lowest.
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If you are looking to invest your money or you want some sort of a practice for you ti fill your investment portfolio, investing in bonds would usually be the first step. However, bonds won’t allow you withdraw your par value unlike investing in other entities such as stocks and small businesses.
However, if you want a low-to-no-risk investment which also is considered as a good ingredient in your investment profile, bonds would be the go-to choice. There are a lot of banks and corporate institutions who offer bonds so make sure to contact them in order for you to gain more information and to know if you’re in the right place.