This analysis gives investors thorough information about bond markets and provides an overview risks faced by bondholders.
Purchasing a bond means you are lending money to a government, whereby the issuer provides a bond in which promises to a specified interest rate during the bond’s life. The capital value will be repaid at the time of investment when a bond reaches maturity. Therefore, it is suitable for those investors who seek a predictable income with a guaranteed return. It is viewed as safe-haven investments with the government backing and low risk. It is widely used by the Government to raise funds when public expenditure exceeds public income. This government bond is known as gilt in the UK.
There are certain features need to be considered in appraising bond investment. First, par value, the amount will be received by holder at the bond’s maturity. Second, bond issuers are either governments or international organizations. Third, maturity dates, the date on which the issuer has to pay the nominal amount. The issuer has no more obligations to the bondholders after the maturity date as long as payments have been made. Fourth, coupon, the interest rate that the issuer pays to the bondholders. which usually fixed. Fifth, coupon dates, the dates on which the issuer pays the coupon to the bondholders, which usually paid annually or semi-annually. Sixth, yield is the return rate of investing the bond. There are two types of yield, current yield, simply the annual interest payment divided by the current market price and yield to maturity, concerning current market price and the timing of all remaining coupon payments and of the repayment due on maturity. Seventh, credit rating, it portrays the quality of the issue refers to the profitability that the bondholders will receive the amounts promised at the due dates.
Generally, the government bonds are valued in increments of 100 and have a certain maturity period. A bondholder receives fixed interest rate and typically made biannually during the term. The entire par value is received when the bond reaches its maturity date. Furthermore, bondholders can sell their bonds in the secondary market instead of waiting till the maturity date to recover the par value. Yield is the method measuring the return received on a bond. High yield is seen risky however offers lucrative returns.
Investors can seize many benefits in holding bonds. First, bonds provide consistent income. Coupon payments are consistently distributed at regular intervals. Second, bonds are low-risk investment. Default risk and credit risk are unlikely to happen since the governments have the highest credit ratings. Third, the large and active primary and secondary bonds market provides great liquidity. Fourth, the safety of the bonds provides. In the UK, the debt interest and principal payments are backed by the taxing and quantitative easing policy. Fifth, bonds provide stability because the majority of the return on bonds comes from the interest payments and fluctuations in the price of a bond will have a little impact on the value of the investment. Sixth, sometimes bonds offer higher interest rate than bank on savings accounts with less risk. Seventh, its diversification let the bonds less volatile than stocks market and stabilize portfolio during stock market struggles. Normally, bond price in the UK is quoted in clean price of the bond, the price excluding accrued interest. The accrued interest is defined as the interest deemed to be earned on a security but not yet paid to the investor. The dirty price is the actual price paid for a bond in the market including accrued interest, whereby bondholders are entitled to hold the bonds between coupon payments. As the next coupon becomes due, the dirty price will exceed the clean price .The dirty price thus compensates the bondholders for holding the bond since the last coupon. Otherwise, the dirty price...