Why do bonds exist? How are they made?
\nLet’s start from the beginning.
\nTo grow a company, This company needs money and investments in itself and very often it happens that this financial need cannot be solved only through the cash created by sales. It therefore becomes necessary to access to loans.
\nThe company may decide to turn to a bank or to the investing public, issuing debt in the form of bonds, so how do bonds works?
\nI give the money to the company and the company pays me annual interest on the amount until the bond matures.
\nUpon expiry of the bond, the company gives me back the value of the bond when I bought it.
\nThe duration of the bonds varies, it is still a long-term investment that lasts years, from 5 to 30 years depending on the type of bond.
\nThe return on a bond is varied and depends on the different areas and risks that are taken.<\/p>\n
It may happen that the company goes into default and no money is returned to you.
\nIn the event of an increase in risk, you are generally not obliged to keep the bond in your portfolio but you can also sell it on the market. This is also true if the bond has risen in price, you can take home a good profit.
\nCompanies have less risk of default than individuals and the bonds considered safer are governative bonds.
\nGovernments also issue debt to pay their expenses, and they do so by issuing bonds of different types, duration and yields.
\nGovernment bonds pay little but are considered risk-free because governments are not supposed to go bankrupt.
\nIn theory, and then countries can always raise taxes to avoid default.
\nIn case of default, however, the bonds are not all the same, in fact we have something called seniority ranking.
\nIn the event of bankruptcy, the oldest bonds will be paid first by the liquidators.
\nThe second safest category on the market are corporate bonds, of large stable national or multinational companies that are considered safe but are still companies that can fail, so these must pay higher annual returns to be attractive on the market.
\nThe third category is High Yield Bonds, also called junk or very high risk bonds.
\nSome important things to keep in mind when buying bonds.
\nBonds can be sold on the market, check the market value as it fluctuates based on previous and subsequent issues.
\nNewer bonds generally pay higher annual interest.
\nHowever, lower interest on newly issued bonds make older bonds with higher interest more attractive.
\nThere are also bonds with negative value in terms of yield.
\nAlways pay attention to the issuer’s credit risk, if it increases or decreases because this affects the value of the bond but also the risk to which you expose yourself on the market.<\/p>\n","protected":false},"excerpt":{"rendered":"
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