As an investor, you must have invested some of your money in bonds. And if you haven’t, then it is true that you are considering investing in them very soon. But before investing, it is crucial that you have a clear understanding of how bonds work, including the risks that your money will be subjected to. Whether it is government or corporate bonds, there are many things you should consider first before investing. In this article, we shall provide a clear guide on how to evaluate bonds before investing.
The risk-return tradeoff
The first thing anyone wishing to invest in bonds need to do is evaluate the kind of risk he can take on without feeling frustrated. Just like any other investment, bonds are volatile and one can easily lose the money. Knowing the magnitude of risk that you can handle will help you formulate a clear strategy on how to invest and the amount you will invest. When making the decision on investing in bonds, it is advisable that you get an understanding of the concept of risk-return tradeoff.
After considering the amount of risk you can comfortably handle, you now need to look at the expected returns from the investment. This is usually expressed in terms of percentage and will allow you know how much you will be getting after a certain period. The main purpose of investing is to get return. But it is not just about returns, you must only consider inventing in investments that can give you high returns.
The bonds’ maturity dates
A bond’s maturity date is simply the date when the investment ends. On this date, the investor gets back his principal amount and sells back the bonds to the issuer. In financial terms, the investor will get the face value plus any interests due which is yet to be paid on coupon. You need to be comfortable with the maturity date before investing in the bonds of your choice.
Even though you might be willing to take a certain amount of risk, it is always important to understand the risk that the money will be subjected to. Among the notable risks that you need to critically examine include the inflation risk, interest rate risk, liquidity risk as well as credit risk. These will have a direct impact on the returns.
Bankruptcy and insolvency are among the leading causes that can make you lose your money easily. You need to evaluate the possibility of getting your money or at least part of it when such circumstances happen. To understand the security of the bond, you need to evaluate its seniority among other secured bonds.
In conclusion, therefore, evaluating all the factors relating to bonds investment is critical. It can either help you get your money or lose all of it.