A3. Why Invest in Bonds

What is a Bond

Bonds are loans, or IOUs, but you serve as the bank. You loan your money to a company, a city, the government – and they promise to pay you back in full, with regular interest payments. Bonds are bought at a specific price, and offer interest income based on a coupon rate.

Check out this video from Investools that provide more information about bonds.

Reasons to Invest in Bonds

  1. High and reliable income: While many investments provide some form of income, bonds tend to offer the highest and most reliable income streams. Bonds provide decent returnss with a lower level of volatility than shares, and with higher income than saving accounts or cash.
  2. Diversification: Common saying among investors is “don’t put all your eggs in one basket.” It may be a cliché, but its time-tested wisdom nonetheless. Over time, greater diversification can provide investors with better risk-adjusted returns than portfolios with a narrower focus. More important, bonds can help reduce volatility – and preserve capital – for shares investors during the times when the stock market is falling.
  3. Protecting your principal (initial investment): Bonds are very useful for people nearing the point where they will need to use the cash they have invested – for instance, an investor within five years of retirement or someone who needs to tap their child’s college fund to pay for school.

 

Disadvantages of Bonds

  1. Bonds are affected by interest rates and currency rates: Unlike shares the price of bonds goes down when the interest rates rise, and a weaker currency reduces the worth of your returns.
  2. Inflation reduces returns: Unlike shares, bond prices do not go up with prices, and your above inflation returns reduce.

 

About Andrew Kwabena

The Editor of MoneyInAfrica

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