Bond is a debt instrument. When you invest in bond, you are borrowing money to the company in exchange for a fixed coupon. You shall get back your capital at the maturity date.

What are the main differences between investing in stock / equity and bond? The following table shows the major differences:-

When investing in bond, there are three areas that we need to look at several elements. Let's use the following bond as example.

  • Maturity date: Every bond shall have a maturity date, i.e. when the bond issuer will return the money back to the investors. For the above example, the maturity date is 5 Jul 2022. Only the perpetual bond has no maturity date which the issuer will have the right to call back the bond at specified time defined beforehand. Perpetual bonds normally carry higher risk because the bond holder might not know when capital can be returned.
  • Coupon rate and coupon frequency: Coupon rate is the interest for the money borrowed. When we invest, we have been agreed to be paid the interest in the form of "coupon". For the above example, the coupon rate is 7.95%. So every year, the investor will receive 7.95% interest per bond paper. Coupon frequency is how often the interest will be paid, it can be quarterly, semi-annually or annually. In the above example, the coupon payment is made semi-annually.
  • Credit rating: This is what determine how risky is the bond. When the bond is higher in risk, the coupon rate will be higher. In the above example the bond is not being rated. Hence the credit risk is quite high. Credit rating is rated by credit agency such as Moody's S&P and Fitch. The higher is the credit rating, the safer is the bond.

The above three elements are the must know before you invest in bonds. Finding a bond with highest return at lowest risk is not easy. Know your goal before you evaluate. Then, the task of evaluating will become easier.

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