#10 What are bonds, really?

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What are bonds, really?

Bonds, like James Bond? Not quite, my friend, not quite 😂.

Picture this – you received a call from your best bud 🙋‍♂️ , he seemed really anxious.

“Bro, I need to borrow some money from you, I am short of cash.”
You hesitated.
“I will return it to you, I promise, and I will pay you interest every month. Give me 12 months, I will then return the lump sum back to you bro.”

Hah! Sounds like a better deal now. Handshake.

Well, a bond is just like that, except your bro is now some well known big corporate, or government that requires funding to operate and to expand. You are the lender, they are the borrower, and the interest you earn – that’s your reward for taking the risk 🫴!

How it works?

Say you buy a bond worth RM10,000 that pays 5% interest annually for 5 years. Each year, you’ll receive RM500 (5% of RM10,000), and after five years, you get your RM10,000 back!

Just give me a reason – why buy bonds?

Nope, I will give you multiple!

1. Income Generation

Bonds provide regular income through interest payments. These payments arrive more predictably than your Grab delivery (for real, duh). If you are looking for steady cash flow, or have a passive income dream, give it a thought!

2. Safe 🦺

If buying stocks feels more like a rollercoaster ride 🎢, bonds are more like riding the Ferris wheel 🎡predictable and relatively stable. Assuming the issuer doesn’t default (refuse to pay), you will get the promised interest and all the money you invest.

And, touchwood, but if the government/company to which you lent money declares bankruptcy, you should be paid before they compensate the stockholders. If you are looking for something safer, bonds could be your to go!

3. Diversification

Holding bonds can help diversify your portfolio, as they often perform differently than stocks. When stocks are performing poorly, bonds might perform well, and vice versa. This counterbalance can help smooth out the overall volatility of your portfolio, and save you from some potential heart attack!

Can I sell the bond before it reaches maturity date?

Definitely! If you choose to sell the bond half way, you can do it via brokers. Do remember that it will be sold based on the current market price, and it may differ from the initial face value when you bought it (we will cover this topic in the future – stay tuned!).

TLDR: You may lose a few bucks, or earn a premium!

If you prefer stocks over bonds, that’s also good for you! One of the reliable stockbroker I have been using myself is moomoo Singapore, but good news is, moomoo is ready to make an entrance into Malaysia later this year! Finance Flash is collaborating with moomoo to bring you exclusive rewards. Open your account and get free rewards when they arrive here!

Word of the Week: Yield

Definition: In finance, yield refers to the income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as a percentage based on the investment’s cost, its current market value, or its face value.

Yield is a crucial indicator of the value and return on an investment. It represents the rewards gained from making the investment and is a way of measuring the income generated relative to the price of the investment.

Yield = Income from investment / Cost of investment

Let’s consider an example of yield from a bond.

Assume you bought a bond for RM 10,000

The annual interest payment (coupon) = RM 500

The yield can be calculated as follows: Yield = RM 500 / RM 10,000 = 0.05 or 5%

In this case, the yield of the bond for that year would be 5%.

This implies that you earned 5% of your initial investment as income during the year. Yield is an important concept for investors, helping them understand and compare the returns from different investments.

Key Economic Dates:

• 16th August: FOMC Meeting Minutes

What I’ve been reading:

Here are the top stories that caught my eye:

• White House restricts U.S. investment in some Chinese tech
• China slips into deflation as prices fall
• Federal Reserve launched FedNow instant-payments service

You’re all caught up!

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Cheers,
Ziet