Why bonds?

Jamaica Gleaner - - INVESTMENT FEATURE - Yanique Leiba-Ebanks Con­trib­u­tor Yanique Leiba-Ebanks, CFA is the AVP, trad­ing and busi­ness devel­op­ment at Ster­ling As­set Man­age­ment. Ster­ling pro­vides fi­nan­cial ad­vice and in­stru­ments in US dol­lars and other hard cur­ren­cies to the cor­po­rate, in­di­vid­ual

THE PROSPECT of build­ing an in­vest­ment port­fo­lio can be very in­tim­i­dat­ing, es­pe­cially when money is tight! How­ever, don’t let any­thing de­ter you; even when you have a lot of debt, you should still put aside a lit­tle to build your port­fo­lio. Start small, save 10 per cent ev­ery month, and if you can’t man­age that, then just do what you can han­dle. Open a US dol­lar sav­ings ac­count and con­vert your sav­ings to US dol­lars. Af­ter it has grown a lit­tle bit, look out for in­vest­ment op­tions with small min­i­mums, such as stocks, then work your way up to bonds.

A bond is a way for a com­pany, a coun­try or an en­tity to bor­row money. It re­ally is no dif­fer­ent from a loan, but in the case of bonds, many small in­vestors and in­sti­tu­tions lend to the com­pany, coun­try or en­tity. The dif­fer­ence be­tween this and Yanique Leiba-Ebanks a loan is that if a com­pany went to the bank, it would be at­tempt­ing to bor­row all the funds from one bank, whereas the risk is spread across dif­fer­ent in­vestors (peo­ple lend­ing the money to these com­pa­nies).

PRE­DICTABLE IN­COME

In­vestors like bonds be­cause they know ex­actly

how much they are go­ing to earn. At the start, you are told what in­ter­est rate is paid (the coupon), and you know what price (per 100) you will pay for the bond. Your in­vest­ment ad­viser will give you the sched­ule of your in­ter­est pay­ments. Most bonds pay twice a year, and when it ma­tures you get back your prin­ci­pal. If you love hav­ing lots of choices, you will en­joy in­vest­ing in bonds. You can in­vest in bonds is­sued all over the world, in dif­fer­ent cur­ren­cies, in dif­fer­ent ma­tu­ri­ties, dif­fer­ent in­ter­est rates, dif­fer­ent pay­ment dates, some even pay back some of the prin­ci­pal (your orig­i­nal in­vest­ment) be­fore the ma­tu­rity date. There are lit­er­ally thou­sands of choices and, cur­rently, the US bond mar­ket is 1.5 times big­ger than the US stock mar­ket.

Buy­ing a bond di­rectly will give you a higher in­ter­est than a bank ac­count or sim­i­lar in­vest­ment, and will ex­ceed the in­ter­est rate on a bond fund, too. The only dif­fer­ence is that you may not be very di­ver­si­fied and will be tak­ing on the di­rect risk of hold­ing a bond.

How­ever, if you choose wisely, you would in­vest in a very liq­uid bond, which means that you can sell it eas­ily if you need the money, and the price will not change as dra­mat­i­cally (less volatile) as stocks. It is an easy way to grow your money and sup­ple­ment your in­come with a high de­gree of pre­dictabil­ity.

If you wish to have Ster­ling ad­dress your in­vest­ment ques­tions in up­com­ing ar­ti­cles, email us at: info @ster­lin­gas­set.net.jm

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