Request a call back

Callback Form

For more information or advice, please fill in your details below and we will contact you shortly.

Sending
×

Art of bond investing

Abstract brush strokes
Portfolio balancing, negating stock market volatility and lowering risk

Bonds have historically been an alternative way to balance a portfolio and negate stock market volatility, and they are treated as lower risk. The art of investing is all about mixing assets to build a portfolio aligned to your investment outlook and attitude to risk, with shares and bonds as primary components. For investors, bonds can provide a stream of returns.

A bond is an IOU, typically issued by a government or company (an ‘issuer’). Companies issue bonds to meet their expenditure or to settle out their debts. Governments also issue bonds in order to settle any financial deficits of the government, and also to bring development. When issued by a company, they are referred to as ‘corporate bonds’. By buying a bond, you are lending the issuer money. Two things are specified at the outset: the agreed rate of interest that the issuer must pay you at regular intervals (the ‘coupon’), and the date at which the issuer must repay you the original amount loaned (the ‘principal’).

Making different market assessments

Bonds can be bought and sold in the marketplace. Their prices change constantly because people in the market make different assessments on two main factors: the likelihood that the issuer will repay its debts (‘credit risk’), and the effect of interest rates (‘interest rate risk’).

If more investors want to buy a bond than sell, the price normally increases. Similarly, if there are more sellers than buyers, the price normally goes down. The rising or falling price affects the yield of the bond. Yield is a way of measuring the attractiveness of an individual bond. However, bonds are not always held until the principal is repaid – they can be bought and sold at any time until the principal is repaid – so there are many ways of calculating the yield. The most common is the ‘redemption yield’. This discounts the value of coupons received over time. It also adjusts for any difference in the price paid for the bond and the principal repaid at maturity.

Generally stable regular income

Bonds pay investors a regular income, and their prices are generally stable. They are also generally considered safer than equities and are issued by reputable companies or governments. Should a company that has issued bonds run into financial difficulty, the bond holders rank ahead of equity holders for repayment. However, the price of a bond can fall as well as rise, and there is no guarantee that an issuer will not default on its obligations. The effects of interest rates and inflation can also erode the future values of returns.

Investors demand a premium for the extra risk they are taking when lending money to a less well-established company or less creditworthy government. Therefore, bonds from these issuers tend to be higher yielding. Comparatively well-financed issuers are referred to as ‘investment grade’, while less secure issuers are referred to as ‘high yield’ or ‘sub-investment grade’. Different types of issuers are affected in different ways. For example, government bonds tend to be more affected by changes in interest rates, while corporate bonds are more affected by the company’s profitability.

Bond investments not right for everyone

Like any security, there are many options when it comes to bond investments, and they are not right for everyone. Various types of bonds can be issued. These include inflation-linked bonds, where payments are linked to changes in inflation, and convertible bonds, which are corporate bonds that can be converted into the company’s underlying equity. Certain types of bonds may be better suited to particular economic conditions or meeting particular investment objectives.

A credit rating can be given to an issuer, either to one of its individual debts or overall creditworthiness. The rating usually comes from credit rating agencies, such as Moody’s, Standard & Poor’s or Fitch, which use standardised scores such as ‘AAA’ (a high credit rating) or ‘B-‘ (a low credit rating).

Considering economic and technical factors

Inefficiencies in the bond market cause potential returns available from one bond or sector to outweigh each other at different times. By carefully researching the issuers in the market, as well as considering economic and technical factors, bond fund managers aim to manage portfolios of bonds that suit the current investment conditions.

How bond fund managers perform is typically measured against an index of bonds in the region or type of issuer in which they invest. This is known as a ‘benchmark’. The fund manager will aim to outperform the benchmark, as well as protect investors’ capital when the wider market is falling.

Bond Jargon

Face Value/Par Value

The par value or face value is a term used to define the principal value of each bond, which means the amount you had paid while purchasing the bond. The amount that you paid while purchasing the bond is the exact amount that you should expect in return once the tenure of the loan is completed.

Maturity Date

The maturity date of a bond is the date on which the bond validity expires, and the company or government that issued you the bond should pay you back the entire face value or par value at the end of the maturity date.

Coupon

A coupon is the annual interest amount in percentage that you will be receiving for the face value of the bond.

Yield

The yield of a bond is the percentage of annual interest that you get paid for your bond depending on the current market value of the bond you purchased.

Investment Grade

Investments in terms of bonds are generally made by taking the bond investment grade into consideration. The bond investment grade can be considered as the score of a company depicting how likely the company is to pay back your bond after the end of the maturity date.

The investment grade for each company is offered by different agencies such as Moody’s, Fitch and Standard & Poor. In order to be considered trustworthy for buying bonds from, any company should have at least a rating of ‘BBB’. The companies with a ‘BBB’ grade rating are highly likely to pay back your investment amount after the maturity date and are safe bond investments. The companies that have a rating of ‘BB’ or lower are considered to have a ‘junk grade’ and is not at all recommended while buying bonds.

Want to review your current and future investment plans?

We believe that receiving professional investment advice is vitally important. So if you would like to review your current and future financial plans, please contact 01403 333145 or email areeves@reevesfinancial.co.uk for a review or your requirements.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

This is for your general information and use only and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. For Reeves Financial, published by Goldmine Media Limited, Basepoint Innovation Centre, 110 Butterfield, Great Marlings, Luton, Bedfordshire LU2 8DL Content copyright protected by Goldmine Media Limited 2017. Unauthorised duplication or distribution is strictly forbidden.

Adam Reeves

Author: Adam Reeves

DipPFS Cert CII (MP&ER)
Independent Financial Planner, Wealth Manager, Director

Last updated on

Read our reviews

Vouched For
×

Adam and his team undertook in-depth research into our existing QROPS schemes and clearly set out both pros and cons of transferring the funds back to the UK. Having decided to go ahead with the transfer, Adam and his team worked extremely hard to facilitate the transfer. The QROPS pension trustees were not always the most professional or responsive organisation – however we were very grateful for the perseverance and commitment that Adam showed us as clients.

Jonathan – East Sussex

Adam offered a range of financial products , the one he suggested was affordable and proved to be a good choice.  Returns on investments have exceeded my expectations, based on Adam’s advice and guidance. Profits have enabled house improvements to take place.

David - Surrey

Adam arranged an appointment very timely, he explained his role and qualifications as an IFA giving me reassurance , we went through my retirement and investment goals. Adam discussed my options explaining in great detail, I felt relaxed during our discussions allowing me to fully understand my choices. I feel very confident in the financial advice allowing me to enjoy my retirement.

I was very happy with Adam’s recommendations and explanations of financial products which would suit my retirement goals, I feel this has helped me review and reduce my financial risk as I reach retirement, leaving me feeling confident that I can enjoy my retirement plans.

Ron – West Sussex

After initial meeting Adam put together a very detailed and thorough written plan. At our second meeting he went through the whole booklet and explained everything in layman’s terms which made it a lot easier to understand.

I am very happy with everything that was suggested and put in place especially with something as big and important as pensions. Adam and his team have taken a huge weight off my shoulders and I would highly recommend their services to anyone needing help with their financial planning and pension.  Adam couldn’t have been more helpful, and even came outside his normal area to meet me on a number of occasions.

Richard - Kent

Unfortunately I had to claim on my critical illness insurance due to my wife being ill and because of the sound advice Adam gave in acquiring this insurance we ended up being financially safe through a tough time.

Steve - Kent

Adam did a review of our financial situation, confirmed that Flexible Drawdown best suited our needs as a family, and then did all the research into the best product for us. He will continue to monitor it for me. He acted extremely promptly because we had a deadline for requiring the lump sum; went out of his way arranging meetings during non-office hours, was professional yet friendly and explained a difficult subject very well.

Clare – East Sussex

Adam did a thorough review of my pension policies, clearly explained how well they had performed, how flexible they were, how the market regulation has changed, and, crucially, what the tax implications would be if I were to leave them untouched. He accurately assessed my attitude to risk and recommended an up-to-date solution that will offer me the greatest flexibility at retirement.

Greg – East Sussex

Adam was quick to assess & understand my situation, and was able to discuss & communicate in a very concise and simple way the various options available to me, taking time for me to understand and clarify where necessary. My understanding & knowledge of taxation & pensions has increased significantly allowing me to feel much happier making financial decisions for the future.

Rob – West Sussex
Read all our reviews here
×
Indices
Value Move   %     
FTSE 100
7,952.6220.64 stock arrow0.26 stock arrow
FTSE All Share
4,338.0512.12 stock arrow0.28 stock arrow
Currencies
Value Move   %     
Euro
1.170.00 stock arrow0.02 stock arrow
United States Dollar
1.260.00 stock arrow-0.04 stock arrow

Market Data

Data is compiled by Adviser Portals Ltd every 60 minutes. Information is not realtime. Last updated: 29/03/2024 at 12:00 PM
×