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Many beginning investors and even some moderately experienced investors may have issues with understanding the exact workings of bonds and the bond market as a whole. The bond market may be intimidating, but it doesn’t have to be. Understanding a few key concepts and a little bit of terminology will help you navigate the ins and outs of bond investing.

Bonds are simply a way for governments and companies to borrow money. Instead of seeking financial resources from a bank or other lending facilities. These institutions can seek to sell bonds to a large group of investors in an attempt to raise the necessary capital it requires to operate or grow. Typically, issuing a bond can be less expensive than a bank loan and tends to offer more flexibility.

For the investors, it’s helpful to just think of yourself as a lender when you invest in bonds. Investors buy bonds from the company/government that issues them, and the company/government promises to pay back investors the principal amount plus interest. Interest payments are paid regularly (usually quarterly, semi-annually or annually) until the bond “matures” or reaches the end of its agreed term.
Bonds are issued in varying terms of lengths, they may mature in the very short term (days or months), short term (one to five years), medium term (six to 10 years) or even long term (more than 12 years). Typically, the longer the term of the bond, the higher the coupon rate. The coupon rate is the key indicator to the investor on the amount of interest he or she will get over the life of the bond. For example, a bond with a 5% coupon rate and a $1,000 face value will pay the bondholder $50 each year.
Bonds also have a credit rating based on how likely they are to be paid back in full. These may vary between different bonds, but they generally range from AAA for the highest quality bonds down to D for bonds in default or non-payment.

The lower the credit rating, the higher the risk of default. For the investor, this can also translate to taking on higher potential returns for taking on more risk.

How the Initial Bond Market Works
Bonds issued in primary markets are similar to a company’s initial public offering (IPO) of stock. Companies looking to raise money via bonds coordinate with investment banks to set the coupon rate, the terms of the issue and the total amount of money the company is going to raise.
The investment banks then sell the bonds usually to large institutional investors (who make up the bulk of bond buyers) through an initial offering. These bonds are issued by the borrowing company at an offering price that is uniform for all investors. This standard price is known as the par value, which is usually $100.00 per bond. However, it is also important to note that it is common for a company to issue bonds at a discount (for example, selling a $100.00 bond for $99.50) or at a premium (for example, selling the instrument at $100.10 which constitutes as above par).

Secondary Bond Market
After the initial offering, investors may buy or sell bonds on the secondary market through brokers. Think of a secondary market like a used-car market, where once “new” bonds are sold secondhand to other investors.

The Secondary Bond market is much more accessible to smaller investors, and you don’t have to be an investment banker to take part. However, it’s vital that investors understand how bond prices move when interest rates change. As a rule, when interest rates rise, bond prices fall. The opposite is true as well — as interest rates decline, bond prices increase.
However, the change in interest rates impact bonds differently depending on many factors, including time to maturity. Individual bond investing can at times be more complex and requires much more diligence and research than stock investing.

As with all investments, it is important to assess risk when purchasing bonds. Analyzing the price, interest rate, yield, redemption features, taxation and the company’s credit history and rating when weighing which bond to choose.

Investing in individual bonds can also at times be expensive, especially if you desire to buy several different bonds to create a diversified portfolio. Many bonds are associated with minimum buy in amounts and this can range from around (but are not limited to) $2,000 USD up to $200,000 USD.

Bond Exchange-Traded Funds
For those interested in a bond investment with lower expenses, a bond ETF makes a great alternative investment. These securities may hold/ track the performance of several bonds, diversified by term/ market segment, credit risk, and/or type.

Bond ETFs are much like stocks in that they are traded on the stock exchange. Similarly to stocks, bond ETF prices fluctuate with demand and may also be sold at any time.

As the characteristics of stocks & bonds differ, both can yield a number of benefits for clients, but most importantly it is about matching your investment strategy/ goal and risk attitude with a proper mixture of securities.

If you liked this article and want to read other great stories, try our Archives. Also if you are new to investing you can try our Investment Basics Blog.

If you want to start investing with SSL but don’t have the time to monitor the market or to conduct the trades yourself then you can choose one of SSL’s managed Financial Planning products. We offer a variety of products for every type of investor and if you are interested in managing online trades yourself and having complete control over your investment portfolio then you can try SSL’s Brokerage account.

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What is wealth? Can I become wealthy? How do I become wealthy? Should I invest in the stock market?

These are all questions that we might find ourselves asking at some point or another in our lives. Unfortunately, these questions are not easily answered with a yes or no and there is no wrong or right answer to these questions. However, there are some things you should know before attempting to answer these questions and they are ‘The Truths About Wealth’. Before you start investing, it’s best to first be informed.

Truth #1 – Wealth is accessible to All but, not all will access it!
This is a fact, but if you have already been deterred by this harsh but true statement then you have already started off on the wrong foot or rather, no foot at all because it is likely that you would not even bother to make that first step. In order to access wealth, you have to put yourself in a position to do so; by starting now, not later, whether it is spending less, saving more or investing in stocks or other securities.

Be a ‘go getter’ and make wealth accessible to you even if it means taking risks. Don’t be afraid to lose, because it is imperative to believe that you can always get it back and even more. Being proactive also means a change in your mindset, your mentality and the way you think. Be optimistic and don’t limit yourself. If you never see yourself as having your dream house, then chances are you will never work for it or put yourself into the position of attaining it. Remember, small efforts lead to small results so think wealthy, think big.

Truth #2 – There is no universal formula to become wealthy!
The path to wealth is nothing short of being a maze. There are many ways of generating wealth and what works for me may not work for you, nor do we all have the same opportunities to begin with. However, one recommendation by the experts that would appear to work for all is diversification. Diversification surrounds the idea of “not putting all your eggs in one basket”. Although saving is a big part of accumulating wealth, it is not enough. One needs to have multiple streams of income or earnings.

Your income should be active as well as passive. An active income would include your earnings from your job and, for most of us, this is definitely not enough to make us wealthy. Passive income, on the other hand, follows the concept of making your money work for you. One good example of making your money work for you is investing it, whether it be in stocks and securities or real estate. So think about earning your salary (active income), while getting rent from property or dividends from stocks (passive income).

Truth #3 – Most wealth is accumulated over generations!
Another truth is that most wealthy persons or families are where they are today because of generational wealth. Wealth inherited and passed down from generation to generation. This, therefore, gives credit to the statement that “the rich will always get richer” because it is easier to make more money when you already have money. As a result, the wealth that we would probably like to amass in our lifetime would have to have started from your ancestors and won’t be entirely for our benefit.

Wealth is about hard-work and sacrifice. A sacrifice made now so your children and their children will have a better start. Even if you were not one of these wealthy “generational fortunates”, you still have the chance to allow your successors to be one. This is not to say that those who have inherited wealth enjoys the spoils without hard-work and sacrifice, which leads me to my next truth.

Truth #4 – It is easier to become wealthy but harder to maintain it!
A teacher once told me that it is easier to get an A and harder to keep it. Anyone can get lucky and win the lotto, but chances are they will lose it even quicker, ‘easy come easy go’. It takes foresight, a sound plan and good management to maintain your wealth. I am not asking you to be a prophet, but only to be aware and informed, don’t be one of the ones who say “ if only I did this when I was younger if only I knew better”. So be honest with yourself, if your forte does not involve good money management and planning, don’t be afraid to go to the professionals, they are not all profit hungry. If you are interested in investing in stocks and securities, go somewhere where not only are you appreciated, but where your investments appreciate.

Truth #5 – Wealth is freedom but more responsibility!
Wealth can be good and bad. It offers you financial freedom but you might find yourself with more desires and more expenses. The term “more money, more problems” comes to mind. However, I also believe in working hard and playing hard, so I encourage you to enjoy the fruits of your labour and don’t be a miser. Spend but don’t be greedy, know when to hold and know when to fold. Don’t make spontaneous financial decisions that satisfy your need for instant gratification. Start making wise financial decisions that will benefit you for the rest of your life.

Truth #6 – Wealth is achieved not perceived!
Don’t spend too much time looking at other people’s wealth. Quite often, the persons who appear to be wealthy have a surplus of loans and negative credit card balances. Be guided by wealthy people but don’t be deterred by them. Don’t let someone tell you that your plans are not worth it. After all, some people will always want to see you do well but never better than them. True wealth is earned, and it is not always about working hard but working smart. Let your money do the work for you. Be committed to your plans and investments and don’t be haphazard.

Truth #7 – Wealth is not only monetary!
Finally, invest in your wellbeing, your health, your body, your mind, your family, your friends, and your passion. Remember being wealthy doesn’t always mean having money, it involves being happy with what you have.

If you liked this article and want to read other great stories, try our Archives. Also if you are new to investing you can try our Investment Basics Blog.

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Category: Investment Basics

Understanding the Bond Market

The Truths About Wealth