Bonds, like equities, are another important investment asset class. Bonds are basically an IOU between you (the lender) and corporations or governments (the borrower). Bonds are also known as fixed income. The interest you earn is paid in regular intervals. This interest is called coupon because in the old days, bonds were issued as bearer certificates and had detachable coupons printed on them for each scheduled interest payment. Find out if bonds fit your investment profile.
How bonds suit your investment needs
If you prefer to receive steady and regular payouts, bonds offer a predictable income stream at fixed intervals. Moreover, if held to maturity, bondholders get back the entire principal assuming the bond issuer does not default due to financial difficulties.
Types of bonds you can invest in
You can choose to buy a government or corporate bond depending on your risk appetite. If you are risk averse, government bonds are regarded as a less risky option, but you may have to contend with lower returns versus a corporate bond with similar features.
Bonds are also rated according to their creditworthiness. The rating assigned to a bond will help you to choose between the financially stronger issuers from the weaker ones.
Decide your investment time frame
It is important to fix a time frame for any new investment as your needs will vary with time. As a bond typically comes with a maturity period, it can match your future lump sum cash outlay requirement if it coincides with the bond’s maturity date.
A complementary role in your investment portfolio
Bonds can bring significant diversification benefits to your investment portfolio. The steady income from bonds can mitigate the volatility of equity price movements.
Moreover, bond prices may not move in the same direction or of the same magnitude as equity prices.
Factors affecting the price of bonds
Bonds have a reputation for being safe investments, but are by no means risk-free. The most keenly watched factor that affects bond price is interest rate. Bond prices move in the opposite direction to interest rates.
If you choose to hold your bonds to maturity, you will be less affected by the daily price movements caused by changes in interest rates.
