As an entrepreneur or finance personnel, you definitely will want to cut cost and maximise profit. You definitely will also want to ascertain the security of your money invested.
Investing in bonds is a very good way to invest and also to enlarge your portfolio.
Although bonds could be less risky than stock, they pay lesser rewards when compared to it.
Experts say that as you grow old, you should invest more in bonds because its less risky than the other types and the chance may not be available to recover from losses if any occurs
WAYS TO EARN MONEY FROM BONDS
From the above write up, am sure you have a bit of an idea on why bonds are important. Now let’s get to how you can make money through it.
1. EARNING INTEREST THROUGH BONDS
Interest is one way of earning interest on a bond Most bonds are issued on a “coupon,” which shows that the interest rate is paid by the issuer each year. This is generally based on the current interest rate and the business or organization’s sustainability.
The key to understanding of bonds is the inverse relationship between bond prices and interest rates. The bond is less valuable if interest rates rise and its face value decreases.
Another thing to know about investing in bonds is the floating interest rate of certain bonds. It means that the rate of the coupon will change as the bond rate rises or decreases. Floating bonds are more common with investors as they expect interest rates will increase. But they are in danger. When interest rates decline, the voucher rate will also drop.
Fixed-interest bonds are often considered more stable because you know what you do when you purchase a bond. They have a risk, however. If the interest rates mainly rise, you will not increase the rate of your coupon and you will lose your potential income anywhere else.
When you buy bonds, you loan money out to a user. The user could be a corporate body or the government
The coupon rate attached to bonds depends on several factors such as the level of interest at that time, the maturity of the bond and the credit rating of the issuer.
Let’s give a example, let’s say you buy a #10000 bond from Pepsi and the interest rate is 7%-, then you should get a #7000 interest income per year.
If the maturity period for the bond is 20 years in the future, then you will get your original #10000 investment 20 years back from the day it was issued.
2. GENERATE CAPITAL GAINS
You may have a capital gain if you sell your bonds prior to maturity. A loss of resources is also likely. It will depend upon what the market interest rating is and the status of the bond issuer whether or not you can make money by using this method.
You would probably lose money on your bond sales if the market interest rates have risen after your bond has been purchased. If it’s less valuable than other bonds in the market, investors will have no incentive to buy your bond.
If, however, the current bond rate has dropped, the investors will consider your bond more sought after and you may sell it for profit.
The credit quality of the issuer of the bond is also significant. You will probably lose money on selling the bond if it deteriorated. Without significant reduction of the bond price, no investor will be prepared to take the risk.
But if you’re able to sell your bond for a profit if the issuer has gained credibility over time.
Let me explain it from another perspective
Most bonds are held until maturity. Provided you need money back before your bonds mature, then you have the option to sell them through a broker. If that happens, you can collect a capital gain or suffer a capital loss depending on what’s happened to the issuer’s credit quality.
If you have sold your bond to the company that is from an unbelievably healthy to a bankruptcy filing, then you will only get pennies on the dollar because other bond investors are unwilling to take this chance unless a high rate of return is paid. Therefore, if interest rates have risen, your bond will lose value because creditors will demand that you give them a higher return than the coupon rate.
Investors need their money before their bonds mature so they can sell it to a broker, this could mean two different things, it could me you’ll be experiencing a capital gain or a capital loss.
The result gotten could be as a result of the health of the company.