EXPLAINER | How bonds work - and how to invest in them
Bonds are investments issued by governments, state-owned entities, parastatals, municipalities and corporates when they want to borrow money. When you invest in a bond, you are lending money to the issuer of that bond. The issuer pays you a fixed interest rate over the term of the bond. When the bond reaches the end of its term, the bond issuer will repay you your money, explains
Good quality bonds, like many government bonds issued in countries backed by strong economies, are relatively safe investments because if you hold them to maturity you enjoy a guaranteed return and have little risk of your money not being repaid.The issuer asks an investment bank or in the case of the government, the South African Reserve Bank, to structure the bond.
The interest rate paid on a bond depends on who is issuing it, for how long, and the current interest rates at which money is being borrowed and lent. Bonds are rated by credit rating agencies on the basis of the issuer’s creditworthiness. Investment grade bonds are generally of a high credit quality while sub-investment or junk bonds are much more speculative in nature. The creditworthiness of an issuer can change over the life of a bond thereby affecting the credit rating of the bond.Government and other bonds are also listed on a bond exchange. In South Africa the bond exchange is known as the JSE Debt Market.
It is possible to make good investment gains by buying bonds at a low price and selling when the price is higher, but there is also some risk of not getting that call right.A capital gain if the bond price in the secondary market rises and you can sell at a higher price than you paid for the bond.Buy them on the bond market through a stockbroker. Most individual investors cannot afford to buy bonds in this way as the minimum investment amounts are typically millions of rands.
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