Bonds: a safe investment for centuries - April 15, 2018
Bonds have a history going back more than 500 years. How come they are still around after all this time? The reason is simple: half a thousand years later, they are still one of the safest investments of them all.
The very first government bonds were issued more then 501 years ago, in 1517. It was so long ago that it was issued by the city of Amsterdam, since the Netherlands did not exist yet. The first bond released officially by a government was in 1694 and was issued by the Bank of England. And the success story of bonds thus began.
Bonds help fulfilling needs
From the beginning, bonds are used when a government or company is in need of money. The first bonds by England were issued to fuel their war efforts. Lately, bonds are often issued to help states to function. Municipalities can also issue bonds to help a cause. There are corporate bonds, too, which usually help companies to expand their business.
When investors buy bonds, they basically buy debt. They loan the company money, which in turn offers an interest (also called as “coupon” in case of bonds). Bonds also have a maturity date, a time when issuer repays the money to the owner. Coupon is usually paid twice a year. To have an example, if someone buys a $1000 bond that matures in 10 years and has an interest rate of 2%, they will get $20 every year ($10 twice) and will get back their $1000 at the maturity date. This means $1200 at the end of the 10-year period.
Strengths of bonds
Bonds usually don’t have the highest returns compared to other investments. They do have an important strength though: they are safe and stable. Buying the government bonds of a trustworthy country (or company) means that the investor will surely earn profit during the period. Countries (and companies) may default and be unable to pay their debts, but such high risks are usually foreseen. Also, weaker countries issue bonds with higher returns, since they are less safe and this is how they balance risk. (Yields of government bonds are generally an indicator of a country’s financial state: the stronger the economy is, the lower the return is.)
These instruments are also controlled by authorities. Government bonds can only be issued by states and the state itself guarantees them. In the United States, one such authority is the Department of the Treasury. Before issuing bonds, corporations are also put through scrutiny. These are regulated by the Securities and Exchange Commission in the US. A company also must comply with requirements and has to provide information like terms of the bonds, risks, and the company’s financial condition. Also, the company has to disclose how it will use the money.
A success with investors
All these strengths are serious reasons why bonds are favoured by governments, professional and small investors as well. They are not only empty promises, which can be made by anyone (much like it is in the case of the lately feared cryptocurrency based ICOs). They are strong promises based on actual economic performance. The stronger the issuer (be it state or company), the safer its bonds are.
This is the reason why bonds are a very important part of a well-balanced investment portfolio. They may have smaller returns than stocks, but they also hold a smaller risk and offer a stable and steady return. This has been their strength in the last 500 years and this is still true up to this day.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.