The stock market has been one of the most talked about topics in this website. For years it has been my biggest passions to help more people become Stock Smart in their investments! As what I always say, it is my biggest desire to see more Filipinos be financially free and for them to grab a hold of their finances more than their finances grabbing a hold of them.
But aside from the stock market there are so much investments out there like mutual funds, UITF, Forex, real estate where Filipinos can also invest legally. Inline with the idea of diversification we are kick starting this series on Bonds. The goal of this series is to give a more detailed picture on what Bond Investing is and how you can take part of the action. I am a firm believer of bonds and how it also fits a purpose, need, and goal for every investor.
I hope this series brings you closer to your dreams of being financially free because I know it can be dome! Our expert columnist Rienzie Biolena will be weaving us through the in’s and out’s of Bond Investing!
Catch me in my live training events! (quick plug)
The heart of why I do this seminars is I want to build a generation of Filipinos with the right foundation in stock investing. I want to bring smart investing to every Filipino around the world! If you would like to know more on how you could time the market checkout the trainings below.
Investing is both a science and an art. Science in that it involves, among others, mathematics, precision, testing theories, and applying fundamental laws of economics; an Art in that it also takes creativity to mix together different financial instruments to achieve a goal. As Investing involves different instruments, it is best to be familiar with each instruments—at least the common type in the market. One such instrument are Bonds.
Bonds are proof of indebtedness usually issued by Companies or Governments. As compared to stocks—which are proof of ownership in a Company—bond holders are actually creditors to the issuer. Companies (or Governments) wishing to fund their business may borrow from the public and thus, issue Bonds. In return for the public’s money, bond issuers give interest to the holders, and return the principal after the term of the bond.
For instance, XYZ Corporation, planning a business expansion, shall issue, say, a 10-Year Bond with a 5% interest (or coupon) payment, payable semi-annually. This means that a bond buyer investing P1-Million shall get P50,000 every year, paid P25,000 twice a year for the next 10 years, with the principal P1-Mn being returned at the end of 10 years.
But how does one make money in bonds?
First is through the interest payments called “coupon”. With the above-cited example, a bond is like a cash cow that regularly provides a stream of cash over the life of the bond. On a down market, and when positions in investments are negative, having a reliable and expected source of income like this is a big help. Interest payments, however are taxed, with 20% final withholding tax.
Second, bonds can be sold in the secondary market. When bonds are issued, they are usually sold “at par” or at original value. Thus, the 5% bond of the par 100 will give P5 for every P100 invested. But since coupon payments of bonds are already fixed, how can one make money when selling his/her bond? This can be done by changing the par value of the bond when sold. Thus, the par value of P100 can be sold at a higher “price” like P110 or P115—same coupon payment of P5 but sold already with padded profit or “premium”. Bonds can also be sold below par, or at a “discount”. Depending on market movements, bond prices can change per day. Prices, coupon payments and other bond details can be found at the website of Philippine Dealing Exchange, www.pdex.com.ph.
Why buy bonds?
Since Bonds offer periodic coupon payments, bonds are good for those requiring regular cash flows whenever the market goes. Moreover, with the principal being given back at the end of the bond’s term, it can provide a relatively safer outlet for investment funds. Compared to the stock market, it is also subject to less price changes, and is thus relatively more stable.
It is therefore recommended for retirees or an outlet for near-to medium-term financial goals.
Does it have some risks, too?
Yes, bonds do also carry some risks. For one, the Company issuing the bond may not be able to pay the coupon payments or the principal entirely—a default. The price may also be subject to changes—the bond holder may have to sell it at a lower price if the conditions are not right. Though the principal is returned at the end of the life of the bond, it may already be worth less as it may buy less goods due to inflation.
But as with all investments, the key to managing risks is diversification and being proactive in reviewing the bond holdings. Investing in bonds, nonetheless is a great way to diversify one’s portfolio and hedge against the volatilities of the stock market.