Coupons and redemption values
This matters because, unlike say a share, with a fixed income bond you can predict your returns with absolute certainty provided you hold the bond until it matures.
An important distinction needs to be made here between this nominal value and the bond’s market price. The latter is determined by buyers and sellers who will weigh up the return on offer from a bond and compare it to other sources of income (such as bank accounts or shares) and price the bond accordingly. Since the total cash flows from a fixed income bond are known, the price has to change as market conditions evolve.
Why buy bonds?
Bonds may be bought and held via a portfolio or via a standard fund. There are pros and cons to both so please speak to an Investment Manager to find out more.
Although often lower risk than equities in terms of price volatility nonetheless corporate bonds in particular are certainly not risk free. Investors who may be relying on bonds for income should do some safety checks first. These may be summarised as;
- Duration – this measures the sensitivity of a bond to a change in interest rates and is a function of both the coupon on a bond and the time remaining to maturity
- Liquidity – some bonds are easier to sell than others
- Credit strength – some issuers (e.g. governments) are better placed than others (e.g. companies) to meet their financial obligations to bond holders
- Structure – some bonds have built-in safety features, such as being secured on assets belonging to an issuer, whereas others do not
- Disclosure – there is more information available about certain types of issuer and their bonds than others
As with most investments, the key message with bonds (and bond funds) is “buyer beware” – do your homework and make sure that you understand what you are buying and the associated risks.