SOME people have been asking me “What are bonds?” Simply put, bonds are referred to as debt securities or debt instruments issued by a corporation or a government to raise money from the public. As investing in bonds is considered less risky, people tend to invest with the objective of earning higher returns on their investments.

There are many different types of bonds but some of the most common are corporate bonds: those issued by a corporation. The bond holder will receive interest from the corporation periodically for a fixed tenure and will get back the principal along with the interest due at the end of the maturity period. Bonds issued by financial institutions and banks are regulated well and come with good bond ratings. Large-scale investors are the most important investors in this category.

International bonds are issued overseas, in the currency of a foreign country which represents a large potential market of investors for the bonds. Sovereign bonds are bonds issued by governments. They can be either local-currency-denominated or denominated in a foreign currency. Sovereign bonds and sovereign debt can be used interchangeably, but sovereign debt can also refer to the total outstanding stock of a country’s government debt.

The Government of Jamaica (GOJ) bonds experienced a reduction in their interest rates beginning in February 2010 with the Jamaica Debt Exchange (JDX) and again in February 2013 when we experienced the National Debt Exchange (NDX). This represented an exchange of debt instruments between the government and creditors on the local market. This debt exchange allowed the GOJ to lower the cost of Jamaica’s debt service and extend maturity to lower refinancing risk.

Bonds have several characteristics such as face value. This is the amount of money paid to the bond holder by the issuer when the bond matures. When a bond trades at a price above the face value, it is said to be selling at a premium and when a bond sells below face value, it is said to be selling at a discount. If a bond trades at the face value, it is said to be trading at par. Every bond has a maturity date; this is the date that the bond holder will receive the principal he invested. Another term used when referring to bonds is ‘term to maturity’. This relates to bonds that have already been issued. The maturity of a bond is the amount of time left for the bond to mature. Thus, the term maturity changes every day from the date of issue of the bond till its maturity. Interest payments on bonds are referred to as coupon payments. Payment dates on bonds are paid at regular pre-defined intervals (usually semi-annual). It may be noted that the coupon rates are fixed at the time of issuance of the bond. While coupon rates are expressed in annualised terms, coupon amounts depend on the coupon payment frequency.

Yield or the return realised by investing in bonds is slightly difficult to comprehend. The bond yield shares an inverse relationship with bond price and it is generally the movement in the bond price that is a bit confusing. Coupon amount is the periodic interest offered between the issue date and maturity date. Yield is more precisely gains made from an investment and is usually represented in percentage terms. Upon compounding of interest, yield from a given financial instrument increases.

The risk of loss varies between different instruments. The longer the investor intends to keep the investment, the greater the chance of a profit or risk of a loss. There are various ways of investing in financial instruments in order to reduce the risk. It is normally better to invest in several different financial instruments instead of one single or only a few financial instruments. These instruments should have properties which mean the risk is spread and should not gather risks that can be triggered simultaneously.

Ask your wealth advisor about bonds in Jamaican dollars (JMD) United States dollars (USD) Sterling, Euros and Canadian currencies. For example, the Jamaican Teas (JAMT) Corporate Bond in Jamaican dollars is fully secured and pays interest monthly. Your wealth advisor will assist you in choosing the right bond(s) for you based on your risk profile. Whether you are conservative, moderate or an aggressive investor there are a variety of bonds to suit each investor profile, so feel free to call your wealth advisor for further details.

Deborah Vieira is a wealth advisor at Stocks and Securities Limited and may be contacted at dvieira@sslinvest.com