A Beginners Guide
Korea’s Omega, Saving money is great for your financial stability, but investing it can be even better. Today, more than ever, anyone has access to all the tools needed to start investing online. One of the first things to look for before you decide how much of your wealth you want to invest and what tools to use is the asset you want to buy. From stocks to cryptocurrencies, there are plenty of options. In this guide, we’ll cover the basic aspects you should know if you choose one of the most popular investment options – bonds.
What Are Bonds
Besides stocks, korea bonds are the most common investments. These two types of assets can help you build a robust portfolio, which is why many experienced investors and brokers might recommend you own both. While stocks offer the prospect of high returns if their value increases over time, bonds offer stability and a steady source of profit. Bonds are some of the safest types of investments, which is why they usually make up part of a diversified portfolio.
Bonds are essentially debt securities. You can think of them as an agreement between a borrower and a lender. The bond issuer is the borrower and the bondholder is the lender who purchases bonds from the borrower. In exchange for the amount of money they lend when purchasing bonds, bondholders get a specific interest plus capital repayment. These investments are considered more stable than others because the interest rate is often fixed and becomes available at specific intervals. Capital repayment refers to the initial amount you invested and you are entitled to get back at a specific future date known as a maturity date.
Korea’s Omega Management Bonds are diversified investments as they can be issued by numerous institutions. Governments can issue bonds to raise capital. Corporations, banks, and non-financial institutions can also sell bonds. Essentially, when you buy bonds, you lend the issuer money you will get back at a specific date in the future, and interest you receive periodically before that date.
Types of Bonds
Bonds come in different forms. Here are some of the most common types of bonds based on their payment terms.
- Fixed-rate bonds: these are characterized by fixed interest rates.
- Floating-rate bonds: the interest rates of these bonds vary and they are calculated based on an interest rate index after their payment date.
- Convertible bonds: these bonds are issued by companies that allow bondholders to convert their bonds into shares in the company at a specific price per share at a future date after fulfilling the conversion requirements.
- Discount bonds: these are also known as zero-coupon bonds. Coupon is another term for the interests bondholders gain from buying bonds. Zero-coupon bonds are bought at a lower price compared to their face value and the issuer doesn’t make periodic interest payments. Their face value is repaid on the maturity date.
- Subordinateded bonds: these are bonds that come with higher risks because they have a lower credit rating compared to other bonds issued by the same entity. Therefore, if the issuer files for bankruptcy, bondholders will come at the end of the creditor list and have a low repayment priority. However, these bonds normally generate higher returns.
Are Bonds Risky Investments?
The same risks that accompany other investment types are also present in the bonds scene. Liquidity risks are among the most dreaded scenarios. This is when bondholders have to sell their bonds at lower prices because there is little demand for those assets. This can be the case if the issuer faces financial troubles and related reputation problems.
The risk of default is also a problem with these investments. If the bond issuer goes into default, they won’t be able to meet their payment obligations.
Currency problems can also arise if you buy bonds in a certain country and due to external events, the issuer is forced to pay interest in the local currency. The amount you get will then vary based on the exchange rates, which can fluctuate. Interest-related risks can also affect your returns because if interest rates rise, bonds’ prices usually fall.
Why Choose Bonds Over Other Investments?
Despite their intrinsic risks, korea bonds remain among the safest traditional investments. Compared to other options such as stocks or riskier assets like cryptocurrencies, bonds are more stable. Holding bonds helps you gain higher returns compared to keeping your money in a deposit account in the bank. Bonds offer regular returns and their value can increase over time.
How to Start Investing in Bonds?
Start by deciding what type of bonds you want to buy. If it’s corporate bonds, you might want to spend some time learning more about the issuing company. You can also buy governmental bonds if you want a safer choice. After you make up your mind, you can invest in bonds through a broker or an exchange-traded fund (ETF).
Article by Omega Management Korea.
