What Type Of Bond Is Right For You?
Bonds are seen as a good low-risk financial investment and while interest rates on them aren’t very high, they are usually government-backed, so when volatility happens in the markets, they gain because of it. There are a number of different bonds you can invest in, so which type is right for you?
So what is a bond? When you buy a government bond, you are essentially lending the government an agreed amount money – the bond becomes a promissory note issued by a government statement on how much it will pay you back over an agreed length of time. Once the term has been reached, the bond matures. Bonds can come with short maturity dates of one or two years or long ones – up to 30 years. Bonds might also be called by different names, for instance, UK bonds are known as gilts, US bonds are called treasuries and South African bonds are known simply as South African government bonds.
For many investors, buying bonds is similar to buying and selling shares. However, while shares are subject to market price fluctuations, bonds come with predetermined rates of return – known as the bond yield – paid at particular time intervals called payment coupons. Bonds are also indicative of a country’s stock market. When interest rates rise, so do bond yields, but when interest rates fall bond yields tend to follow. This is illustrated by the how it reflects the stock market, so when stocks become riskier, bonds become a safe haven of investment – pushing up the value of a nation’s currency too.
Types of bond
In all cases, bonds can either be high-yield or low-yield and are dependent on the health of the balance sheet of the government or corporation issuing the bond. The relative value of a bond is always affected by the rising and falling interest and inflation rates.
Government (Treasury, Gilt) Bonds – Standard government-backed bonds with set levels of interest payments and timeframe.
Index-Linked Bonds – Don’t have fixed payment coupons and interest payments fluctuate in line with inflation rates – often called index-linked gilts in the UK and treasury inflation-protected securities (TIPS) in the US.
Other Government Bonds – These include municipal bonds issued by local states or government. While they are also relatively safe, they are dependent on local-government financial health.
Investment/Corporate Bonds – Other bonds are available with similar fixed returns over one-to-five years for lump sum investments but they are not always backed by the government. Popular products include ethical investment bonds, green projects bonds, and as corporate financing vehicles.
South African bonds
One of the reasons South African bonds are so popular is that South Africa has the most developed fixed income market on the continent with a securities yield that goes back 26 years. It is also well ahead of other African nations in terms of eurobond issuance. There are two main bonds available in South Africa. The RSA Retail Savings Bond has three, five and ten-year maturities and is ideal for lower-income investors because it generally offers a safe and secure way of delivering dependable returns. Then there is the 10-year RSA Government Bond, which has a historical yield of around 9%.
Choosing the right bond is a choice between bonds with steady gains and ones that carry more inherent risk. Bonds will always have a place in a long-term investment strategy. Understanding how and when a bond reaches maturity will help put each potential investment into clear perspective.
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