Benefits associated with investing in bonds

THE Zimbabwe securities market now offers both equity and debt instruments for investment. Like equities, debt securities can also be traded on an Exchange. Below is a list of some of the merits associated with investing in bonds: Bondholders get paid off first before equity holders upon liquidation of the underlying company. Bondholders are also first in line to receive new securities, cash or a mixture should reorganisation of the business occur. Bonds have guaranteed income based on predetermined terms and conditions. They therefore offer a relatively higher degree of certainty in income than equities. Coupon payments from bonds are consistently distributed at regular intervals hence bonds provide a regular return to bondholders. Bonds typically have periodic interest payments thereby providing a steady and predictable return. Since investments in bonds are based on predetermined terms and conditions, it becomes easier for bondholders to budget and plan accordingly. Debt markets offer a wide variety of bonds (e.g inflation linked, floating rate and convertible bonds) with different characteristics attached to them to suit different investor needs. Tax exempt bonds for instance, are an excellent investment option for high tax bracket investors. Bonds (especially short and medium term) are less volatile relative to equities. Bonds can therefore stabilise the value of an investor’s portfolio during times when the stock market is providing negative returns. Bonds are generally viewed as safer investment havens than stocks. The bond market is perceived to be more liquid given the ability to sell a bigger block of bonds without significantly affecting the market price. There is relatively more legal protection to bondholders which comes through the underlying indentures and covenants Bonds are considered less risky hence more secure than equities as most Governments rarely default. Investing in bonds enables portfolio diversification and preserves value.

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