Investing In Bonds - What You Need To Know About It?

An Overview About Investing In Bonds

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One way to invest your money is by putting it to bonds. In layman's term, bond is similar to debts. If you lend money to someone, you earn through an interest rate as agreed. It's the same thing with bonds.

WHAT ARE BONDS?

Bonds or fixed-income securities are debts that are focused on a short to long-term perspective. As an investor, you are lending your money to a private entity (called corporate bonds) or to the government (government bonds) at a certain interest rate for a defined period of time.
Remember also that in bonds, the lender is called the bondholder while the borrower is called the bond issuer.

HOW TO INVEST IN BONDS?

Commercial banks do not only offer UITF or savings and time deposit investments but also bonds, particularly government bonds. Ask the bank of your choice if they are selling Treasury bonds. These are long-term investment bonds in which they have maturity dates of 10-30 years from the issued date.

If you want bonds from private entities, go for corporate bonds. Proceed to the company’s Treasury Department and ask them if they’re selling bonds.

Another alternative is to invest in a pooled fund (Mutual fund or UITF) and VULs. Remember that in these instruments, you can always choose an area where you want to put your money.

One of them is the so-called bond funds.
Minimum investment capital is Php 5,000.00

HOW BOND INVESTMENT WORKS? 

Just as a creditor-borrower system works, bonds function the same way but in a more formal manner.

One good thing about investing in bonds is that you already know your ROI. Everything’s set on a signed contract so you know how much you can gain right from the start. The entity in which you lend your money agrees to pay you an interest at a fixed amount. This is the reason why it’s also called fixed income securities.

Bonds can also be likewise compared to earning a salary. You earn at a fixed amount and at a fixed date of receiving your interest. Your pay-day in your work is equivalent to maturity date in bonds.

So how does the investment works?

Before you know how your money works, there are three terms that you need to take note of.

  1. Par Value- It is the face-value of the bond or the amount of money the bondholder receives when the bond reaches its maturity.
  2. Coupon rate- the interest rate paid to the bond holder.
  3. Maturity date- it is simply the date when you receive back all the money you’ve invested.

So based from the above-mentioned terms, you earn in bonds through interest payments. The bond-issuer pays you the principal and interest according to the signed contract. However, if necessary, the bonds can be sold anytime but the interest would always depend on many factors, including the direction of the market and the law of supply and demand.

Usually, there is a high demand for bonds in case the market drops because investors would like their money be invested at a safer level. Thus, the concept applies: The higher the demand, the lesser the interest rates or vice versa.
If for instance, the company goes through a financial crisis, bonds will be paid first before stocks. Moreover, you get to be paid the agreed amount when it reaches maturity date.

Technically speaking, bonds may have terms basing from the duration of its maturity. Treasury bills are bonds that have maturities usually in 90 days or more but less than a year. The minimum placement is at 100,000.00-200,000.00 depending on the bank of your choice. Treasury notes are used for securities with less than ten years maturity. For bonds having more than ten years maturity, they are called Treasury Bonds.

IS INVESTING IN BONDS RIGHT FOR YOU?

If you think you are conservative in investing but you would like to place your money in an instrument that’s a little bit higher than what savings deposit in banks (next investment vehicle to be discussed) can offer, then go for bonds.

The risks are lower compared to stocks, pooled funds and VULs but you need to check your expectations before barging in. Average annual return of bonds is at 3-5% but is still subject to inflation risk. Taking a look at the historical performance of the Philippine economy for the last 20 years, the average annual inflation rate was set at 5.5%. This means the cost of commodities may become higher than what you are actually earning. However, don’t look at the rate as constant. Inflation rate may also change from time-to-time. By the end of 2017, the Philippines reached about 3.5% inflation rate so if your bonds has an interest rate of 5%, then your earnings is 1.5% higher, defeating inflation.

If you get easily bored by the lower returns and is on the look-out for something fast-paced and exciting, then I recommend you to try other instruments.


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