What is a bond?
A bond is an investment that has a fixed interest attached to it. The investment amount is loaned to a business or the government. These parties aim to raise funds through other party investments. A bond is usually loaned for a predetermined period, after which it is repaid. Interest is also paid to the investor and these payments are called coupons. Although bonds are less of a risk than equities, they are not risk-free unless they are guaranteed bonds.
What is the difference between a government bond and a corporate bond?
A corporate bond involves lending to a company while a government bond is money loaned to the government. Government bonds are less volatile than corporate bonds.
Corporate bond funds are a type of fund that invests a minimum of 80% of its assets in low-risk corporate bond securities. For this reason, they are less affected by currency fluctuations and company defaults. They are not risk free, however.
What are the risks and benefits of investing in high yield bonds?
A high yield bond is a corporate bond issued against debt with a promise to pay interest. They are classed as high risk. Investment grade bonds are also corporate bonds, but the companies that borrow money this way have a higher credit rating, so the bonds are lower risk.
High yield bonds offer a higher coupon rate than investment-grade bonds. The former is usually found in companies with a lower cash flow. Depending on if cash flow improves, they may appreciate, resulting in greater profits. In the event of bankruptcy, bond investments are paid out ahead of shareholders. Changes in interest rates have a smaller influence on the short-tenure high yield bonds so bondholders are assured of a steady income for the duration of the bond.
Due to low cash flow, a company may not be able to honour its obligations to repay investors. This also affects their liquidity, making them more difficult to sell. The credit rating of a high yield bond can decline and influence its value, leading to heavy losses for investors. A recession can cause a high yield bond to lose its value. It can be risky to invest in these bonds.
What is the impact of interest rates on bond prices in the financial market?
There is an inverse relationship between interest rates and bond prices. As interest rates rise, the price of bonds goes down because fixed interest payments are less attractive when interest rates are rising.
What are the types of bonds available for investment in the financial market, and how do they differ in terms of risk and return?
Types of bonds include high yield bonds, investment-grade bonds, and corporate bonds. Corporate bonds carry market, interest rate, and credit risk. Some of them can be redeemed ahead of their maturity date.
High yield bonds have greater volatility than most other types of bonds. They also carry a bigger default risk. Because of their sensitivity to interest rates, recessions, and general economic conditions, when these factors are present, the number of defaults increases.
Investment-grade bonds have the lowest risk that they will default. They are rated higher than other bonds by agencies that do credit ratings on different bond-investment opportunities. Interest returned to investors is usually lower.
What is the role of bonds in asset allocation for retirement portfolios?
Bonds provide a diversified portfolio. Investors can ladder bonds to pay out annually, for example, to provide an income. Bonds are less volatile than most other assets.
What is a bond fund and how does It work in the investment market?
Bond funds are pooled investments. They may include mortgage-backed securities and exchange-traded funds. Bond funds function to provide an income to their investors.
