Walk With The Market: Learn Bond Trading Now
If bonds are not part of your investment portfolio, you are missing out on the immense benefits they carry. Bonds provide diversification and a predictable stream of cash flow. They also carry tax benefits and are a great tool for saving for the long term.
A bond is a unit of debt issued by a company or government. It pays an annual fixed interest rate or coupon rate, which depends on the credit rating of the issuer and the time to maturity. But some entities are offering variable or floating interest rates as well.
Bond prices have an inverse correlation with interest rates. When interest rates increase, prices decrease.
There are five main types of bonds that you can invest in
- Government bonds
- Corporate bonds
- Municipal bond (Muni bonds or Munis)
- Emerging Market bonds
- Inflation-linked bonds
Bond trading is not rocket science. First, you need to learn the language used in bonds. It will make you more confident and objective when making investment decisions.
Here are the terms commonly used in bond trading.
- Issue price – Original price at which the bond issuer sells the bond
- Face value - The amount the bond will be worth upon maturity.
- Maturity date – Date when the bond will mature and the bond issuer will pay the face value of the bond.
- Coupon Payment – The annual interest paid on the bond calculated on the face value. It is paid from the date of issue to the date of maturity.
- Coupon date – Date when the coupon payment is made
- Credit rating – This is a quality score given to bonds depending on the level of risk involved. The highest rating is AAA, while the lowest is C or D. Highly rated bonds are known as investment-grade while lower rated bonds are known as speculative-grade.
How to Buy Bonds
You can buy bonds through a brokerage, a mutual fund or exchange-traded fund, or through the government treasury department.
Before choosing the bond to buy, assess the level of risk you are willing to take. Low-rated bonds come with attractive yields but carry a high risk.
Know for how long you will be holding the bond and your goal. This will help you pick a bond that works best for you.
You should carry out background research on the company issuing a bond. Check their history with repayments, financial health, and market reputation. These factors will determine how the bond performs and the chances of getting your money back.
How to Manage your Bond Investments
You can choose to manage your bond investments actively. This is where you continuously make changes to your portfolio to maximize your total returns. It is risky but comes with countless possibilities for increased income.
There is also the buy-and-hold method. With this passive method, you hold your position until maturity. You can use the coupon payments to meet your obligations or reinvest them in the portfolio.
You can also rely on a bond index to increase the profitability of your portfolio without taking too much risk.
Bonds can make a profitable addition to your investment. They are less volatile than most investment assets, providing a predictable income stream. And you get your entire investment back upon maturity.
Choose the type of bond and investment strategy that works best for you, depending on your risk tolerance and objectives.