If you are closely linked to the world of investment and money, there is no doubt that you have heard on more than one occasion what a bond is. It is one of the most common forms of investment to make the savings profitable. However, it is not a very simple product since it has different applications as known by investors with more experience in the financial markets. To the point that the bond is spoken very lightly, but sometimes it is not excessively clear about its mechanics to invest our savings.
First of all, there will be no choice but to refer to the general definition of this economic term. Well, the bond is above all a powerful debt financial instrument used by both private and government entities. The bond is one of the ways to materialize the debt, fixed or variable income securities. Therefore, it does not necessarily have to come from the equity markets, as some small and medium investors believe at the moment.
In any case, and so that you understand it much better, it is a financial asset that is listed on the markets and that you can hire at any time to make the accumulated assets profitable. But as its meaning indicates, it can come from different markets and hence you have many ways to channel investments. From the purchase of peripheral bonds to a basket of bonds integrated into an investment fund. Of course, at the moment you have many strategies to open positions in this important financial asset. More than you can think of from the beginning. Do you want to know some of the most basic and at the same time effective?
Bond: issued by the state
This is the form of investment that is most linked to this financial product. Almost always when we talk about bonds, of course, we are not referring to this very universal modality in investment. Beyond other technical approaches and maybe even fundamental. Well, a bond consists of a debt security that can be issued by the state (national, provincial, municipal governments, etc.). It is convenient that you remember it from now on, because the autonomous communities of our country are also issuers of this financial product. Catalonia, Madrid, Asturias, the Basque Country, Galicia, La Rioja ...
Its form of investment is somewhat complex that as the risk of the bond increases, the profitability of this financial product increases. Although you will run the risk of losing all the money if the issuing community cannot pay it or simply declares itself insolvent. This is one of the main reasons why the yield on regional bonds is not always the same. With some very important differences from one to another, although in general they move in a range that goes from 1% to 6% approximately. In any case, becoming a real alternative for the investment that you have at this precise moment.
State bonds, the most traditional
On the contrary, government bonds is one of the more conventional forms of investment since many years. Intended for a rather conservative or defensive user profile, just as your parents or grandparents did in other times when there was not so much variety of financial products. In this sense, of course you cannot forget that this class of bonds in issue are presented under different maturities. Among those that stand out are those destined for 3, 5 and 10 years and that are auctioned with some regularity during all the financial years. However, it is an investment product that currently generates low profitability, below 1,5% and as a result of the current economic situation in the euro zone.
One of the great advantages of taking positions in the so-called government bonds is that they are part of a process that is not at all complex. It is also very safe since its profitability is guaranteed from the beginning. With the characteristics that the interests of the national bonds they will go to your checking account in advance. That is, at the same time that you subscribe them and unlike other types of financial or banking products that you will have to wait for their expiration to collect them. As for example happens in term deposits. It is a factor that encourages some investors to opt for them in contrast to other models for investment.
Return on national bonds
Regarding the interest rate generated by this basic investment product, it depends on the economic cycle. This means that in periods when interest rates are low, as for example happens at the moment, its profitability will be clearly unsatisfactory for your personal interests. While on the contrary, in periods where the trend is completely opposite, you will have more opportunities to improve these intermediation margins. And in this way, get 2%, 3% or even 4%. Although now we are very far from this situation.
On the other hand, bonds of these characteristics have evolved unevenly since 2000. Reaching slightly above 5% to be almost in negative territory, as is happening in recent years. Although at the time of hiring them, the interest rate to which you have linked them through the auction will always be in force. In any case, it is an uncomplicated way to obtain a small profit, without having to take any risks. Not surprisingly, it is one of the most relevant characteristics of the so-called national or state bonds.
Sovereign bonds of other countries
Of course, you are in a position to subscribe bonds of these characteristics and that they come from other nations or geographical areas. For example, peripheral bonds that come from Italy, Greece or Portugal. They are what have the longest journey in terms of profitability. But the risks are enormous because they come from more unstable economies and they can lose a lot of money in operations and of course more than you can foresee from the beginning. You have to know what the economic conditions of the issuing country are like because you can get more than one surprise from now on.
By contrast, the safest national bond is German and which is better known as bund. Not surprisingly, it offers you maximum security that is represented by the solvency of its economy. Although in return its profitability is not very high due to this characteristic of national bonds. In this sense, another basic product is the bonds of the United States and that is in a good part of the portfolio of the small and medium investors. Either through your direct purchase or through investment funds based on fixed income.
Corporate bonds: more profitability
On the opposite side are the so-called company bonds or better known as corporate. This modality in the fixed income markets allows them to improve their profitability, although with a risk in operations. In this format it is easier to get interest close to 5%. They come from companies and do not necessarily have to be listed on the equity markets. One of its most relevant advantages is that you have a wide range of proposals of these characteristics and above the national or regional bonds. Being able to choose between companies of different lines of business.
Within this segment, one of the most representative bonds are the convertibles. In case you don't know, they are the ones that can be exchanged for newly issued shares at a value already set in advance. It is an original proposal to combine variable income and fixed income so that in this way the interest rate that this kind of financial products will provide you can rise. To the extent that the profitability is also higher, the greater the risks you have to take with this class of more sophisticated investments.
Finally, you cannot forget about a model that has acquired great relevance in recent years, such as junk bonds. To the point of offering a high yield as they are considered high risk securities. They are not highly recommended to hire since through them there is much more you can lose than gain. Like the so-called perpetual debt bonds, which in all cases do not contemplate the return of the principal capital, but rather propose the payment of interest indefinitely.
As you have seen, there are many bonds that are available in the financial markets. Of all the modalities and nature and that can serve at certain times to make your savings profitable. Either individually or in combination with other financial products. This will depend on the profile you present as a small and medium investor at all times. As one of the classic alternatives to saving.