INVESTOR
EDUCATION
INVESTOR
EDUCATION
Bond
Bonds, also known as public bonds or debt securities, are a type of valuable instrument issued by governments, institutions, or corporations. They represent a commitment to repay debt, whereby the issuer guarantees to pay interest and principal to bondholders according to agreed-upon conditions.
The main characteristics of bonds
1. Principal: Bonds have a fixed face value, which represents the amount owed by the issuer to the bondholder.
2. Interest: Bondholders are entitled to receive fixed or variable interest payments within a specified period, usually calculated on an annual basis.
3. Maturity Date: Bonds have a maturity date, upon which the issuer pays the bondholder the principal amount.
4. Issue Price: Bonds can be issued at face value (par value) or at a market price (determined by market conditions).
Types of bonds
There are various types of bonds, including government bonds, corporate bonds, convertible bonds, and more. Different types of bonds come with different yields, risks, and redemption conditions. Investors often use bonds to achieve stable fixed income, capital preservation, and risk diversification.
It is important to note that although bonds offer relatively stable returns and lower risks compared to other investment instruments, bond investments also come with corresponding risks such as interest rate risk, credit risk, and inflation risk. Therefore, before investing in bonds, investors should assess their investment objectives, risk tolerance, specific risk factors of the bonds, and consider seeking advice from a professional investment advisor for comprehensive financial guidance.
Here are some common types of bonds:
1. Government bonds: Bonds issued by government entities, which can be classified as international, domestic, or local government bonds. Government bonds are generally considered the safest type of bonds because they are issued by sovereign nations.
2. Corporate bonds: Bonds issued by corporations to raise funds. The risk of corporate bonds depends on the credit rating and financial condition of the issuing company.
3. Mortgage-backed bonds: Bonds secured by assets such as real estate or automobiles. The return on mortgage-backed bonds is closely tied to the value of the underlying assets.
4. High-yield bonds (commonly referred to as “junk bonds” in the bond market): Bonds issued by lower-rated companies or developing countries. These bonds typically offer higher interest rates but come with higher risks.
5. Investment-grade corporate bonds: Bonds issued by companies with higher credit ratings. These bonds have relatively lower risks due to their higher credit ratings.
6. Municipal bonds: Bonds issued by local or regional governments to fund public projects.
7. Convertible bonds: Bonds that can be converted into company stock under certain conditions. These bonds provide bondholders with the option to convert into shares when the company performs well.
These are just some common types of bonds, and there are other types as well, each with its unique risk and return structure. Before investing in bonds, it is recommended to thoroughly research and understand the corresponding risks and return characteristics in order to make informed investment decisions.
Risks associated with bonds
Here are several risks associated with bonds:
1. Credit risk: Also known as default risk or debt risk, this refers to the issuer’s inability to pay principal and interest in a timely or full manner. If the issuer defaults on its debt obligations, investors may suffer losses.
2. Interest rate risk: This risk arises from fluctuations in interest rates. When market rates rise, the value of existing bonds may decline as investors can purchase newly issued bonds with higher yields. Therefore, bondholders may be stuck with lower fixed interest rates, resulting in an opportunity cost.
3. Market risk: This refers to the impact of overall market conditions on bond values. Factors such as economic recessions, political events, or financial crises can cause market volatility, which in turn affects bond prices. Investors may face the risk of declining bond prices.
4. Inflation risk: Rising inflation can have a negative impact on bonds. As inflation erodes the purchasing power of money, fixed-rate bonds may fail to keep up with inflation growth in terms of future interest and principal payments, leading to a decrease in real returns.
5. Market liquidity risk: This refers to the ease with which bonds can be bought or sold in the market. If a particular bond market lacks liquidity, investors may find it difficult to sell or acquire the bonds they hold, which can affect their trading ability and price discovery.
For the basic knowledge and trading mechanism of Bonds, please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at (www.ifec.org.hk) when referring to information using this link.
Bond
Bonds, also known as public bonds or debt securities, are a type of valuable instrument issued by governments, institutions, or corporations. They represent a commitment to repay debt, whereby the issuer guarantees to pay interest and principal to bondholders according to agreed-upon conditions.
The main characteristics of bonds
1. Principal: Bonds have a fixed face value, which represents the amount owed by the issuer to the bondholder.
2. Interest: Bondholders are entitled to receive fixed or variable interest payments within a specified period, usually calculated on an annual basis.
3. Maturity Date: Bonds have a maturity date, upon which the issuer pays the bondholder the principal amount.
4. Issue Price: Bonds can be issued at face value (par value) or at a market price (determined by market conditions).
Types of bonds
There are various types of bonds, including government bonds, corporate bonds, convertible bonds, and more. Different types of bonds come with different yields, risks, and redemption conditions. Investors often use bonds to achieve stable fixed income, capital preservation, and risk diversification.
It is important to note that although bonds offer relatively stable returns and lower risks compared to other investment instruments, bond investments also come with corresponding risks such as interest rate risk, credit risk, and inflation risk. Therefore, before investing in bonds, investors should assess their investment objectives, risk tolerance, specific risk factors of the bonds, and consider seeking advice from a professional investment advisor for comprehensive financial guidance.
Here are some common types of bonds:
1. Government bonds: Bonds issued by government entities, which can be classified as international, domestic, or local government bonds. Government bonds are generally considered the safest type of bonds because they are issued by sovereign nations.
2. Corporate bonds: Bonds issued by corporations to raise funds. The risk of corporate bonds depends on the credit rating and financial condition of the issuing company.
3. Mortgage-backed bonds: Bonds secured by assets such as real estate or automobiles. The return on mortgage-backed bonds is closely tied to the value of the underlying assets.
4. High-yield bonds (commonly referred to as “junk bonds” in the bond market): Bonds issued by lower-rated companies or developing countries. These bonds typically offer higher interest rates but come with higher risks.
5. Investment-grade corporate bonds: Bonds issued by companies with higher credit ratings. These bonds have relatively lower risks due to their higher credit ratings.
6. Municipal bonds: Bonds issued by local or regional governments to fund public projects.
7. Convertible bonds: Bonds that can be converted into company stock under certain conditions. These bonds provide bondholders with the option to convert into shares when the company performs well.
These are just some common types of bonds, and there are other types as well, each with its unique risk and return structure. Before investing in bonds, it is recommended to thoroughly research and understand the corresponding risks and return characteristics in order to make informed investment decisions.
Risks associated with bonds
Here are several risks associated with bonds:
1. Credit risk: Also known as default risk or debt risk, this refers to the issuer’s inability to pay principal and interest in a timely or full manner. If the issuer defaults on its debt obligations, investors may suffer losses.
2. Interest rate risk: This risk arises from fluctuations in interest rates. When market rates rise, the value of existing bonds may decline as investors can purchase newly issued bonds with higher yields. Therefore, bondholders may be stuck with lower fixed interest rates, resulting in an opportunity cost.
3. Market risk: This refers to the impact of overall market conditions on bond values. Factors such as economic recessions, political events, or financial crises can cause market volatility, which in turn affects bond prices. Investors may face the risk of declining bond prices.
4. Inflation risk: Rising inflation can have a negative impact on bonds. As inflation erodes the purchasing power of money, fixed-rate bonds may fail to keep up with inflation growth in terms of future interest and principal payments, leading to a decrease in real returns.
5. Market liquidity risk: This refers to the ease with which bonds can be bought or sold in the market. If a particular bond market lacks liquidity, investors may find it difficult to sell or acquire the bonds they hold, which can affect their trading ability and price discovery.
For the basic knowledge and trading mechanism of Bonds, please refer to the information provided by Investor and Financial Education Council. You should pay careful attention to the Liability Statement section on the homepage of the website of The IFEC at (www.ifec.org.hk) when referring to information using this link.
