Karrian Hepburn, Contributor
HEPBURN
THERE ARE several ways to invest in bonds; you can either buy individual bonds, bond funds, or unit trust investments. Other options include sovereign debt, which is issued by a country, and corporate bonds backed by companies. The most commonly traded bonds in Jamaica, are denominated in U.S. dollars or euros, and are referred to as global bonds. These bonds usually offer a higher rate of return than the market rates on instruments such as government paper and fixed deposits. The yield or return would, however, depend on the price and risk rating of the bond.
Bonds are usually sold as long-term investments. However, some can be bought for the short-term. Bonds are often sold as long-term instruments because of their price volatility or price fluctuation. This fluctuation can be either good or bad. If the bond price goes below what you paid then it means that your principal would have been eroded. If there is a price appreciation, you would have made a capital gain. The worst-case scenario is that a bond may be defunct.
This occurs when there is a default on the bond's interest payments, and the repayment date of the principal becomes uncertain until the bond is restructured.
Your investment adviser can help you find a bond that matches your risk tolerance, yield expectations, and investment time line. Most individual bonds are traded on the over-the-counter (OTC) market. The OTC market is where securities firms and banks trade bonds by phone or electronically. Some dealers keep an inventory of bonds 'in-house'. This means that they buy and sell bonds for their own account. They also buy and sell bonds from other dealers on behalf of clients and in that regard act as agents. Your investment adviser will also provide you with the security's offering statement, or prospectus-the official document that explains the bond's terms and features - as well as the risks that investors should know about before investing in a new bond issue (bond just coming on the market).
SECONDARY MARKET
Bonds that have already been issued can also be bought and sold. This would be on the secondary market. Many dealers keep inventories of outstanding (previously issued) bonds and if not, they can readily source them for you.
Bonds sold in the OTC market are usually sold in US$1,000 denominations. Bond prices normally include a mark-up, which constitutes the dealer's costs and profit. If a broker/dealer has to seek out a specific bond that is not in their inventory for a customer, a commission may be added to compensate for the costs and efforts of serving the customer's special needs. Each firm establishes its own prices within regulatory guidelines, which may vary depending upon the size of the transaction, the type of bond you are purchasing and the amount of service the firm provides.
Essentially bonds represent another investment instrument for either diversification purposes or good returns. Speak to your investment adviser about them.
Karrian Hepburn is an investment adviser at DB&G's Kingston branch. To discuss investing and available options, contact her at info@mydbg.com or toll free at 1-888-CALL DBG.
