Financial Bonds

After the stocks the most common and riskless investment opportunity we can go through are bonds. Bonds are very effective way of investment compared to stocks. The returns may low than stocks but the risk and assurance is more guaranteed compared to stocks or any other investments

1. What is a bond?

Bond is a type of loan which is given to the government or a private company in the name on interest repay over time. It means you give a specific amount of capital to a government or corporate for a specific period of time as maturity and the government or company pays to interest over the time.at the end of maturity period we can get our capital back. The pattern may Similar to fixed deposits but the risk and gains are different.

2. Why does a government or company issue bonds?

As a company or government they may have lots of projects and ideas to implement in the country(Like building a park, community assets, monuments, funding security features). For that they need money. Apart from giving ownership to investors through stocks, to generate that fund, they issue bonds. By issuing bond an investor can buy the bond and give the certain amount of money for the bond value. By these funds the government or company implements the project or idea.

3. How the bonds work?

For example if you buy a bond worth of 1000$. Then you will get a bond paper of 1000$. There are several bonds with different maturity period. So in this case if your 1000$ bond have 10% of annual interest and 5 years of maturity period, then you will get 100$ every year. And after 5 years you will get 1000$ back. So totally now you have 1500$.This how bonds works.

Bonds are not an individual property. You can sell your bond to anyone anytime within the 5 years of time. But the issue here is if you want to sell the bond before the maturity period then you have to face an issue. Because most of the time the bonds capital value decrease over time. So it will leads you to sell the 1000$bond for a price which is lower than 1000$. So selling a bond before maturity period it not a good idea. But in some cases the price may go up than the initial value. So in those cases selling may be profitable for you.

4. What are the Types of bonds?

The Sri Lankan bond market made up of government securities (Treasury bills and Treasury bonds), corporate/company bonds and bank bonds listed at the stock exchange, and we have corporate unlisted company bonds also. There are no mortgage bonds or infrastructure bonds because we don’t belongs to  that type of living, but there are some kind of bonds in the name housing finance also there.

• If a bond issued for short time period it’s called treasury bills. Mostly it have maturity period somewhere around 1-5 years.
• If a bond issued for long time period it’s called treasury bonds. Mostly it have maturity period somewhere around 5-10 or more years.
• Sri Lanka Development Bonds are the types of bonds allocated for new projects and useful public sector schemes. It also has a different time frame according to its bond type.
• Corporate bonds are issued by private sectors but the guarantee assurance may be not given as the government securities in private corporate bonds but the gain and interest rates of corporate bonds are higher compared government securities.

5. What are the advantage and disadvantage of bonds?

When it comes to investments are will be pros and cons are there. Bond are also non exceptions for this. Bonds have their own unique advantages and risks.

Advantage

Bonds have a low risk compared to stocks. Because it price don’t fluctuate throughout the time like stocks

We can get a great interest for our capital until the maturity period compared to other investments like fixed deposits or any insurance investments.

You can sell the bond to anyone anytime based of your preference. So you can get back the invested capital if you want

Risks

If the companies you have invested in go bankrupt or failure path then your capital may be at risk

IF the scheme or project which your bond made up with not performed well or it results as unexpected then your capital will be at risk

Some bonds have call provision, which means the issuers can get back the bond from you any time before the maturity period and pay you the capital based current market rate.

Bond values also fluctuate little. So if you want to sell your bond before the maturity period and the bonds current market price is lower than the price which you bought. Then you have to sell it for the loss.

( If you wish to Watch a cool video explaining this topic – CLICK HERE )

Author’s Disclaimer

Risks are common in investment.

It will affect you badly when you blindly invest into a random bond. You have to research the bond type and its performance certificate over time.

However something’s past performance may not guarantee the future performance, but you can get a clear idea about the bonds performance.

Always do your own research on each bond types and choose which one works for you best for your current situations and preferences like maturity period and interest rate.