The driving for beginners for investments in bonds

The bonds are a contract with which an investor borrows money on an issuer (usually a company or government) for a fixed period of time at a fixed interest rate. Here’s how you can start investing in them, even as a beginner.

Types of ties

Investments in bonds can be a useful tool for diversifying the wallet and generating performance. The state, corporate, municipal and international obligations are the best known, each with a certain structure and with some characteristics:

• State obligations are issued by the government and are considered among the safest investments, since the risk of state failure is extremely low;
• Business bonds are issued by companies and usually offer greater efficiency, but have a higher level of risk;
• Municipal bonds are issued by the Municipalities and are often free from taxes, which makes them attractive for some investors;
• International obligations are issued by governments or companies outside the country’s country of residence and can offer opportunities for geographical diversification.

Another classification of the bonds is carried out on the basis of the maturity. Short -term ties have a maturity up to two years, medium -term ones have a maturity between two and ten years and long -term ones have a maturity of over ten years. The term maturity can influence the surrender and risk associated with the obligation. For example, longer deadlines can provide higher yields, but they are also more susceptible to interest rates. Discover different types of interest and how to calculate them.

It also takes into account the difference between convertible and not noticeable obligations. The convertible obligations allow you to modify them in actions of the transmitters company, thus offering the potential to increase the actions. The non -convertible obligations, on the other hand, do not offer this right, but can provide greater efficiency as compensation.

The main characteristics of the ties

Bonds are debt tools used by entities such as companies or governments to borrow money from investors. In exchange for money borrowed, the entity promises that it will refund the amount on a certain date, known as maturity, plus a certain percentage of interests. Therefore, bonds are a way in which companies and governments are financed, offering investors the opportunity to obtain a performance for their funds invested.

The interest rate, or the coupon, is the amount that the issuer of the obligation owes the investor for the loan. This is established at the time of the issue of obligation and, unlike other forms of loan, does not change during the life of the obligation. Find out how to invest in the stock exchange as a beginner, if the bonds are not for you!

The nominal value of an obligation represents the amount that the issuer undertakes to reimburse the investor upon expiry. However, the market price of an obligation can vary, influenced by many factors, including the demand and demand on the market, the interest rate and the quality of the issuer.

Advantages of investments in bonds

Investments in bonds can contribute to the diversification of the portfolio. Although the bonds are considered less risky than other forms of investment, such as shares, they can provide a balance between high risk and low risk investments.

In case of bankruptcy of a company, investors in bonds have the priority for reimbursement. This means that if a company in which you have invested, you will go bankrupt, you will be among the first to be paid. This is a significant advantage for investors who want a higher degree of protection for their investments.

• stable income: Interest payments are regular and predictable;
• safety: Government and high quality obligations have a low risk of non -payment;
• diversification: adds stability to an investment portfolio composed mainly of the shares;
• Protection of inflation: Some links, such as suggestions (titles protected by treasure inflation), are designed to protect against inflation.

The risks associated with bonds

Investments in bonds, although received as confident of other forms of investment, such as shares, are not without risk. One of these is the market risk. This refers to the fact that the obligations are subject to prices of prices caused by the variations of the interest rate. When interest rates increase, the prices of the bonds decrease and vice versa. This can lead to losses if the investor is forced to sell the obligation before his maturity.

Credit risk refers to the possibility that the compulsory issuer cannot fulfill its financial obligations, with consequent inability to pay the interest or reimbursement of the capital upon expiry of the obligation.

During the high periods of inflation, the purchasing power of fixed payments by an obligation can be eroded. This risk is higher for bonds with lower interest rates and longer deadline periods. Find out how to influence the inflation rate of exchange courses.

• Credit risk: the risk that the issuer is not able to honor his obligations;
• Risk of interest: The value of the bonds decreases when interest rates increase;
• Risk of inflation: Inflation can erode the actual value of interest payments;
• Risk of liquidity: Some bonds may be difficult to sell to the desired value.

Key terms

• principal: the initial amount borrowed, which must be returned to maturity;
• coupon: the interest rate paid periodically to the investor;
• expiration: the date on which the main must be returned to the investor;
• product: the total return rate of the investment, including interest and possible capital gains;
• Credit evaluation: Assessment of credit risk of the issuer, made by rating agents.

How to start investments in bonds?

To start investing in bonds, follow these steps:

• includes the concept of ties;
• He takes into account these three main risks: credit risk, risk of interest and risk of liquidity;
• Choose the right type of bond;
• If you are not sure of your choice, consult a financial consultant.