Investing in Bonds
INVESTING IN BONDS
Bond definition in simple terms is that a bond is a security issued by corporate or public bodies to generate capital for business expansions. Bond investment is a very profiting investment if made carefully. Before investing in it, it is important to know every detail about bond investment, to avoid loses.
A bond is like a loan for which you are the lender. Companies and governments need funds to expand into new markets and they typically need far more money than an average bank can provide. Due to this, companies and governments offer bonds to public market. The organization that sells a bond is known as the issuer (borrower) and the holder of the bond is known as the lender (investor).
Bonds provide the borrower with external funds to finance long-term investments. The borrower in return pays investor fixed interest (the coupon) that is usually payable at fixed intervals (semiannual, annual, and monthly). In this way the investors know the exact amount of cash they’ll get back upon the date of maturity.
Bond market is a financial market where the participants can issue new debt or buy and sell (trade) debt securities. There are primary and secondary markets, whereby in primary market the participants (borrowers) can issue new debt securities and sell it to the lenders; and in secondary markets the participants can buy or sell debt securities in the form of bonds amongst themselves.
The participants include: government, traders, individuals and institutional investors.
The main aim of a bond market is to provide a mechanism for long term funding of public and private expenditures to gain capital for government projects and business expansions. The bond market includes government-issued securities and corporate debt securities. A bond market is essential for the ongoing operation of the private and public sector.
Bond valuation is determining the fair market price or value of a particular bond. It also includes calculating the present value of the bond’s future interest payments. Investors use bond valuation to determine what rate of return is required for an investment in a particular bond to be worth the time and money required to buy the bond and hold it up till maturity.
Bond valuation can be calculated by hand or you can choose to employ a financial adviser or use the aid of a bond valuation calculator on the internet (free of charge).in order to calculate the bond valuation there are some basic information that is required like the amount, dates, interest payments and the maturity date
A government bond is a debt security issued by national government to support government expanding and spending. The government generally promises the investor to pay a certain amount on a certain date, plus the interest payments.
Government bonds are issued in its own currency by the government itself. Government bonds are known of free credit risk, as the government is always able to print more of its own currency to redeem the bond at maturity.
Pros & Cons of Bond Investment
Advantages of investing in Bonds
There is an income advantage. When you purchase bonds you are lending money that will be repaid with interest over a period of time.
The fixed interest rate will help you calculate the possible amount of return you will get upon the maturity date of the bond.
Potential tax benefits.
Less chances that you will lose out on your investment.
The interest rates are higher than in other forms of investment.
There is no need to monitor bond investment like some other investments as everything is pre-decided and the investor is aware of the date of maturity, the interest rates and the return amount.
Disadvantages of Investing in Bonds
There is risk involved.
Security disadvantage- if the borrower cannot repay the bond then it will go into default.
The interest rate of bonds are very less when compared to shares.
The duration of some long term bonds can be of many years. In this way the investor’s money will be tied up with one Investment Company and he will lose the chance of investing in something that would have generated high income return.
- First you as an investor should look at your personal financial situation.
All kinds of investments involve some risks. When you purchase any securities it is possible that you might lose some or all of your money but the reward for taking this risk is the potential for greater investment returns. Therefore, it is important to make careful investments which are less risky and will make good profits.
You should consider investing in more than one asset. This will reduce the risk of you losing all your money if one of the assets investment return falls.
You should diversify your investment. In this way you will be able to limit your loss and reduce the fluctuations of investment returns.
Save some money for emergencies.
You should clear off any debt as soon as possible.
Make regular investments and buy investments when the price is low.
Avoid the temptation of junk bonds.
To invest in bonds in New Zealand there are a certain things that you should know or do to get started:
First of all, you as an investor should learn how bonds work, what bonds are right for you and learn the terms bond yield and learn to calculate return figures. There are many different types of bonds and you should familiarize yourself with those with some in-depth information. This will help you decide which one will benefit you the most. You should learn some basic bond definitions like issue date, issue size, maturity value, coupon, yield to maturity, real return and real yield and also learn their differences. For example, the difference between coupon and yield to maturity is that a coupon will tell you what the bond was paid when it was issued while the yield (or yield to maturity) will tell you how much will be paid in the future.
Understand your financial need and then decide on the amount you should invest in bonds.
Buy discount bonds. Buy bonds when the bond prices are lowest. Bond prices are lowest when the interest rate peaks.
You should contact tax advisers and insurance agents and follow online links to find information about firms that offer bond investment. Federal government, state and local governments and corporations offer bond investment.
Open an account with them. Purchase your bonds through a brokerage firm.
Record all the information about the transaction made, including the bond name, interest rate and transaction fee.
There are many reasons why you should invest in bonds. Some of the reasons are:
For retirement purposes- bond investment offers fixed income and this can be saved for retirement purposes. Bonds are a popular option for those who need to live off of their investment income because bonds tend to offer the highest and most reliable income streams.
Savings for children’s education, new home or any other financial goals can be achieved through bond investment.
Bonds can help reduce volatility and preserve capital for investors when the stock market is falling.
Bond investment offers potential tax advantages.
Where to Invest in Bonds
Where to get started with Investment bonds?
In New Zealand there are a range of fixed-interest bonds for you to invest in. Newly issued debt securities can be brought through the investment advisers and share brokers. Some of the NZ companies that issue bond investments are:
They offer new debt securities and also provide a secondary market whereby the investors can buy and sell debt securities through NZX advisers. They offer fixed income securities for a range of corporate and government bonds.
New Zealand Government Kiwi Bonds
Government bonds-Kiwi Bonds- can be purchased through some registered banks, NZX brokers, chartered accountants, solicitors, investment advisers and investment brokers. Kiwi Bonds is only available to New Zealand residents. The duration for Kiwi Bonds are of six months, one year or two years and they are dominated in New Zealand dollars.
Phone: +64 9 488 8777
Free phone in NZ: (0800) 655 494