Investing in bonds is a popular way to create passive income and manage risk. Bonds are debt instruments issued by government agencies or companies that provide fixed income in the form of interest until the principal amount is repaid. Here are the main aspects to consider when investing in bonds:
What is a bond?
Definition: A bond is a debt instrument in which an investor provides money to the issuer (government or company) in exchange for a promise to pay a certain amount of interest (coupon) and return the principal at maturity.
Types of bonds:
Government bonds: Issued by governments (e.g., U.S. Treasury bonds, OFZ in Russia). Usually have low risk and low yield.
Corporate bonds: Issued by companies. They may have higher yields but also higher risk than government bonds.
Municipal Bonds: Issued by local governments to finance public projects. Often have tax advantages.
How to choose bonds for investment?
Yield: Estimate the coupon yield and current yield of the bond. The coupon yield is fixed, while the current yield depends on the market price of the bond.
Maturity: Bonds can have different maturities ranging from short-term to long-term. The longer the term, the higher the risk, but the potential yield may be higher.
Credit Rating: Use credit agency ratings (e.g., Moody's, S&P, Fitch) to assess the creditworthiness of the issuer.
Credit Risk: Evaluate the financial health of the issuer. Corporate bonds have a higher risk than government bonds.
How to invest in bonds?
Buying directly: You can buy bonds through the stock market or a financial intermediary. For this, you will need a brokerage account.
Bond funds: These funds invest in a portfolio of bonds, offering diversification and management by professional managers. You can invest in open-end or closed-end bond funds.
Exchange-traded bond funds (ETFs): ETFs that invest in bonds offer liquidity and ease of trading in the stock market.
Investing in bonds can be an important part of your financial strategy, especially if you are looking for stable income and low risk.