What are bonds?
Bonds are basically loans issued by companies, municipalities, states and sovereign governments. When you purchase bonds, you are essentially lending money to the bond issuer. In return, the bond issuer will pay a steady stream of coupon payments (also known as interest payments) at a fixed rate over a predetermined period, which was agreed on at the time of purchase. The investor will then get back the borrowed amount, (also known as face value, par value or principal amount), on the maturity date, the date of which repayment was agreed on.
Bonds are issued to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.
Why should you incorporate bonds into your portfolio?
Stable Interest Income
Bonds provide a predictable income stream (known as coupons). This reliability of income is hard to come by in other types of investments. Upon maturity of a bond, the bondholder gets back the principal amount that was invested initially, with regular coupons received as interest payment in the interim.
Bonds have a defined lifespan, from its issuance until its maturity. During the life of a bond, its price may fluctuate whilst traded on the secondary market. However, if bondholders hold a bond until maturity, they are certain to receive the principal of the bond at par value, barring the risk of default. Investing in bonds can help to preserve one’s capital, should one hold the issue to maturity.
Generally, bonds do not move in tandem with equities and provide a source of diversification for investors as compared to having just equities. Diversification across asset classes can provide investors with better risk-adjusted returns than an equity portfolio.
Bonds often act as a portfolio stabiliser during market downturns. During past stock market crashes, bonds conferred resilience to investors, thanks to its steady and predictable cash flows which helped cushioned the fluctuations of prices. Enhance the resilience of your portfolio with a bond today.