How to invest in bonds: a beginner's guide to buying bonds

Revolut · 12 juin 2024Tiarnán McCartney

What are bonds?

Bonds are key instruments in the world of finance, used by governments or corporations to raise capital and offering investors fixed coupon payments at regular intervals. For a more in-depth understanding of bonds, check out our blog post.

How do bonds work?

Bonds function by issuing debt. When an organisation or government needs funds, they offer bonds to investors, essentially borrowing money. In return, they commit to repaying the principal along with interest over the bond's lifespan. Investors receive periodic interest payments until the bond reaches maturity, at which point they receive the principal amount back.

What are the different types of bonds?

There are various types of bonds, including:

Government bonds

These bonds are issued by governments to fund public spending initiatives. They're considered low-risk investments and are often used as benchmarks for other fixed-income securities.

Corporate bonds or ‘non-gilts’

Corporate bonds are issued by corporations to raise capital for business expansion or other purposes. They typically offer higher yields than government bonds but come with higher risk.

Pros and cons of investing in bonds

Pros:

  • Fixed income stream
  • Diversification
  • Capital preservation

Cons:

  • Lower potential returns compared to stocks
  • Vulnerability to interest rate changes
  • Credit risk

What affects the price of bonds?

Several factors influence bond prices, including interest rates, credit ratings, inflation expectations, and market demand.

What causes bond yields to rise?

Bond yields can rise due to various factors, including inflation concerns, economic growth prospects, and central bank policies.

How have bonds performed against equities?

Historically, bonds have provided lower returns than equities, but with lower volatility and downside risk. They play a crucial role in diversifying investment portfolios and managing overall risk.

About the risks

Investing in bonds, while often considered safer than stocks, still carries its share of risks. These include interest rate fluctuations, credit risk, inflation eroding returns, liquidity issues, and reinvestment risk. It’s also important to remember that a company or government may default at any point during the bond duration, potentially resulting in the total loss of your initial investment. Managing these risks is essential for maintaining a balanced portfolio.

Investment services are provided by Revolut Securities Europe UAB (305799582) - an investment firm authorised and regulated by the Bank of Lithuania. Revolut Securities Europe UAB does not provide investment advice. Capital at risk. Returns are not guaranteed. You may receive less than your original investment or lose the entire value of the initial investment. Past performance and forecasts are not a reliable indicator of future results. Returns may be affected by currency fluctuations. Further information can be found on our Risk Disclosure and Trading FAQ. Revolut’s cryptocurrency and commodities services are offered by Revolut Ltd (No. 08804411).

Partager l'article