Bonds are difficult to understand unlike equities
The common phrase I hear on bonds is that they are difficult to understand unlike equities. The truth is the opposite, equities are much more complex than bonds, as there is no right or wrong way to value equities and no one can be absolutely sure of the right price of a stock.
Bonds on the other hand are straightforward, you invest in a bond and over the tenure of the bond you get periodic cash flows that are normally constant and at the end of the tenure of the bond you get back your capital. The return on the bond is the interest rate offered on the bond at the time of investment, say 6% or 7% or 8%. Equity returns are volatile and you can either lose money or make good returns.
Bonds are "Safe"
Given that bonds offer steady cash flows and capital is returned on maturity, bonds are considered safe investments. However the term "safe" depends on many factors such as the strength of the issuer, the maturity period of the bond and various other factors that may place your capital at risk. Investors have lost money in many cases of wrong bond investments
Bonds are "safe" when there is good certainty of the issuer being able to service the bond throughout the tenure of the bond or when inflation in the economy is kept down as high inflation leads to sharp fall in bond prices.
Bonds are boring
Bonds are seen as boring as returns are fixed and higher returns are not possible. However, when timed well, bonds can give high returns that can go up to even 20% in a year. An investment in a 30 year maturity government bond, where there is no fear of credit risk, can give returns of 20% when investment is made at a time when interest rates are high. Fall in interest rates by 1% and above can lead to price of the 30 year bond rising by over 10% and capital gains added to interest paid on the bond will giver total returns of 20%.
Corporate bonds can also gain in price on improved financial strength of an issuer and markets pricing of the risk of the issuer goes from high to low. There are many other ways that bond investments can give high returns and not be boring.
We would love to hear back from you. Please Click here to share your valuable feedback.
