Bonds can be described as interest bearing debt instruments issued for a specified period with fixed or variable interest rates and having maturities that exceed a year. Just as individuals sign up for loans with banks and other credit institutions, governments and corporations also solicit for credit.
The difference is that the amount these large corporations need usually surpasses what a bank can give; so government in particular may do so through the issuance of Treasury bills or join corporations in the bond market. Businesses on the other hand are faced with the option of selling a part of their businesses in stocks or borrowing from the public through the issuance of bonds. Thus, when you buy a bond you are simply lending to the issuer of the bond.
Typically, bonds pay interest semi-annually. Bonds often have a fixed interest but there are floating-rate bonds which have their interest rates adjusted to market conditions. Like stocks, bonds can be traded. When a bond is sold at a price lower than the face value, it is said to be selling at a discount. If it is sold at a price higher than the face value, it is selling at a premium.
Ghana’s first listed cedi corporate bond is from Izwe Loans followed by AFB. Bayport Financial Services holds the largest cedi bonds so far. Approval for listings has also been granted to Ghana Home Loans and Edendale Properties.
|Izwe Loans Limited||GH¢38.5million||GAX|
|Bayport Financial Services||GH¢78.5million||GAX|
WHY INVEST IN BONDS?
- Bonds provide a predictable income stream because of the interest they generally pay twice a year. However, some bonds may pay monthly, quarterly, annually or not at all, depending on the terms of the bond.
- Bonds serve the objective of capital preservation. If the bonds are held to maturity, the bondholder is guaranteed being paid back the entire principal.
- Financial advisors proffer bonds because they help balance one’s investment portfolio by offsetting the risk exposure that volatile stock holdings portend.
- When a company folds up, bondholders are one of the first to be paid off if the company’s assets are liquidated.
- Bonds can be bought and sold on the open market just like stocks.
- Secured bonds are backed by collateral and thus offer marginal to no risk.
We will explore next the risks associated with the buying and selling of bonds, and some basic terminologies. If you are thinking investment, then the buying of bonds is one of the sure ways to go. Contact a financial advisor today for sound advice.