Investing in bonds
What is a Bond?
A bond is a debt security issued to raise funds. It is kind of like a bank loaning money except that this time you are the person giving out the loan at a promised rate of return.
Types of Bonds
- Corporate bonds: issued by companies
- Government bonds: issued by governments
What do You receive as a Bondholder?
- Interest payments (coupons)
- Your principal sum on maturity (par value)
Bonds used to be perceived as low-risk investments which tends to move opposite of interest rates & shares. A typical asset portfolio in the old days would consist of shares & bonds.
However, today bonds are at risk of failure from companies (and even governments!). Depending on the bond rating, bonds can range from a low-medium to high risk investment.
There are 3 major bond rating agencies that assign a creditworthiness score to bonds issued.
- Standard and Poor’s
- Fitch Ratings.
It has become easier for individual investors to buy bonds in recent years. However, bonds still require typically $25,000 (RM100,000) and above to invest for some degree of diversification. If you have a smaller amount to invest, consider bond funds.
- Credit Rating
- Yield-To Maturity (YTM)
- FSM Bonds (fundsupermart.com.my)
Bonds from RM10,000 and for sophisticated investors only