Bonds are very popular right now for investors looking for higher income and capital security.
Over the past 4 years in a falling market, bonds have outperformed direct equities and are therefore seen as a better alternative.
Unfortunately, investors mistakenly think bonds are risk free like term deposits... they are not.
The only guarantee a bond has over equity is the income; the risk of the Bond is directly related to the underlying company. The underlying company is the company, which issues the bond such as NAB, QBE, etc.
Bonds level of security will range from senior secured debt – senior debt – subordinated debt – hybrids.
The higher the security level, the lower the interest rate.
Like equities, if the underlying company goes into liquidation then the bondholder is at risk of losing their investment.
Bonds have an inverse relationship to the government cash rate. If interest rates goes up the value of the bond goes down and vice versa. Due to this relationship a bond carries risk of loss of capital if you need to sell before maturity.
The upside of Bonds is that your income is guaranteed. The company must pay the income on the Bonds before any other distributions are made. If the income is not paid, then it accumulates.
Bonds are now available to the retail investor. So if you are looking for security and a rate higher then term-deposits, Bonds maybe for you.
For more information please contact us on 07 4771 4577.
Subscribe to Grow Your Wealth the FREE weekly financial newsletter.