BOND in a nutshell

What is a Bond ?

Bonds are a form of debt. Bonds are loans, or IOUs, but you serve as the bank. You loan your money to a company, a city, the government – and they promise to pay you back in full, with regular interest payments. A city may sell bonds to raise money to build a bridge, while the federal government issues bonds to finance its spiraling debts.

Nervous investors often flock to the safety of bonds – and the steady stream of income they generate — when the stock market becomes too volatile. Younger investors should carve out a portion of our retirement accounts – 15% or less, depending on one’s age, goals and risk tolerance – to balance out riskier stock-based investments.

That doesn’t mean that all bonds are risk-free – far from it. Some bonds happen to be downright dicey. As with all investments, you’re paid more for buying a riskier security. In the bond world, that risk comes in a few different forms.

The first is the likelihood the bond issuer will make good on its payments. Less credit-worthy issuers will pay a higher yield, or interest rate. That’s why the riskiest issuers offer what’s called high-yield or “junk” bonds. Those at the opposite end of the spectrum, or those with the best histories, are deemed investment-grade bonds.

How long you hold the bond (or how long you lend your money to the bond issuer) also comes into play. Bonds with longer durations – say a 10-year bond versus a one-year bond – pay higher yields. That’s because you’re being paid for keeping your money tied up for a longer period of time.

Interest rates, however, probably have the single largest impact on bond prices. As interest rates rise, bond prices fall. That’s because when rates climb, new bonds are issued at the higher rate, making existing bonds with lower rates less valuable.

Of course, if you hold onto your bond until maturity, it doesn’t matter how much the price fluctuates. Your interest rate was set when you bought it, and when the term is up, you’ll receive the face value (the money you initially invested) of the bond back — so long as the issuer doesn’t blow up. But if you need to sell your bond on the secondary market – before it matures – you could get less than your original investment back.

Up until now, we’ve talked about individual bonds. Mutual funds that invest in bonds, or bond funds, are a bit different: Bond funds do not have a maturity date (like individual bonds), so the amount you invested will fluctuate as will the interest payments it throws off.

Then why bother with a bond fund? You need a good hunk of money to build a diversified portfolio of individual bonds. Depending on the type of bond portfolio you’re looking to build, it could require tens of thousands in order to do it right. Bond funds, meanwhile, provide instant diversification. We explain more on the differences between bonds and bond funds in our next publication.

Treasury Bills - T-Bill

Short-term (usually less than one year, typically three months) maturity promissory note issued by a national (federal) government as a primary instrument for regulating money supply and raising funds via open market operations. Issued through the country's central bank, T-bills commonly pay no explicit interest but are sold at a discount, their yield being the difference between the purchase price and the par-value (also called redemption value). This yield is closely watched by financial markets and affects the yield on municipal and corporate bonds and bank interest rates. Although their yield is lower than on other securities with similar maturities, T-bills are very popular with institutional investors because, being backed by the government's full faith and credit, they come closest to a risk free investment. -- www.businessdictionary.com

BREAKING DOWN 'Treasury Bill - T-Bill'

T-Bills are attractive to investors because they offer a very low-risk way to earn a guaranteed return on invested money. They benefit the government because the government uses the money raised from selling T-bills to fund various public projects, such as the construction of schools and highways. T-bills can have maturities of just a few days up to the maximum of 52-weeks, but common maturities are one month, three months or six months. The longer the maturity date, the higher the interest rate that the T-Bill will pay to the investor.

Source: mrpepe.com

Where can I purchase T-Bills?

T-Bills are sold via commercial banks and official agents such as merchant banks, and sales are open to individuals and corporate investors.

Benefits to Investors

There are a number of advantages that T-bills offer to investors. They are considered low-risk investments because they are backed by the government. With a minimum investment requirement of just ₦50,000 or ₦500,000 in some other banks, they are accessible by a wide range of investors. In general, interest income from Treasury bonds is exempt from state and local income taxes. They are, however, subject to federal income taxes, and some components of the return may be taxable at sale/maturity. The main downfall of T-bills is that they offer lower returns than many other investments, but these lower returns are due to their low risk. Investments that offer higher returns generally come with more risk.

Can I sell my T-bills before it matures?

It is possible to sell your T-Bills before maturity using the OTC (Over The Counter) market. Because this is governed by the forces of demand and supply, you might make a loss if you choose to sell them before their maturity date.

How secure are T-Bills?

As T-Bills are based full faith of the Federal Government of Nigeria, they are considered one of the most secure investments to make. They can also be used as collateral, and are accepted by all banks.

Basic Investing Strategies

Learning how to invest is an important life lesson. Here are a few investing strategies for people who'd like to start investing money without obsessing.

Learning how to invest your money is one of the most important lessons in life. You don't need to be college educated to start investing, in fact, you don't even need to be a high school graduate. You just need to have a basic understanding of business and have the confidence to make a plan -- consider it a business plan for your life. You can do it.

Why Investing Can Be Scary

For many of us, money and investments weren't discussed at home. These subjects may even be taboo within certain households -- quite possibly, in households that don't have much money or investments.

If your parents or loved-ones aren't financially independent, they probably can't give you good financial advice (despite their best intentions). And even if your family is well-off, there's no guarantee that their financial advice makes sense for you. Plenty of parents encouraged their kids to buy a house during the peak of the housing bubble, because in their lifetimes, housing only went up.

Having said all of this, the first investment that you make will probably be the hardest.

What Should I Invest In?

The most common investments are stocks and bonds, which most financial advisers agree should be held in some proportion based upon your personal circumstances. Stocks represent partial ownership of a company and bonds are a form of "I owe you." Mutual funds can own stocks or bonds or both on your behalf.

There are other ways to invest -- for instance, forex trading-- and these types of investments have their place. But you needn't focus on them if you are just starting out -- sticking to stocks and bonds (and the funds that hold them) is just fine. But if you have debt -- whether, it's credit card debt, mortgage debt or student loans -- it may not make sense for you to own bonds, or, to invest at all.

Know the Difference Between Saving and Investing

There are a few steps before you can become a successful investor: you being employed, having essential insurance coverage, having your personal debts under control and having an emergency savings account in case you lose your job.

Your investments and your savings are very different things. What if the stock market crashes and you lose your job? If you do not have a cash savings account -- and your unemployment benefits do not cover your living expenses -- you'll probably have to sell your investments at the worst possible time. Don't fall into this trap.