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Understanding bonds

  • 29-09-2018 1:36am
    #1
    Registered Users Posts: 8,240 ✭✭✭ Pussyhands


    So I've read a bit about these but not fully understanding them.

    I understand when one issues a bond and the money is lent at an annual interest rate and the principal is paid out at the end.

    But how does the whole buying and selling of bonds work?

    Let's say there's a bond of €1,000 with a yield of 5%. That means there's an interest payment of €50 a year. I would have thought buying or selling the bond would mean you pay €1,000 + whatever value the bond is at depending on the interest rates in the banks. (i.e higher interests rates would make bonds less attractive as you could have your money earning better rates elsewhere. Likewise if the interest rates were lowered to say 1%, the value of the bond would increase because the % increase of the interest repayment would be greater than what it started out at)

    I'm just browsing bonds on degiro and there's a lot of 3-5% bonds. Would these not be a good way of making money?


Comments

  • Moderators, Business & Finance Moderators Posts: 7,827 Mod ✭✭✭✭ Jim2007


    Pussyhands wrote: »
    I'm just browsing bonds on degiro and there's a lot of 3-5% bonds. Would these not be a good way of making money?

    People have written entire thesis on the pricing of bonds and I have no intention of going into the topic. The bottom line is that if you buy a bond today with a coupon rate of say 5%, the price you will pay will not give you much if any advantage over current prevailing interest rates, assuming it is a government bond rather than a corporate bond.

    Many people are under the illusion that bonds are save investments, but this is not true, they just have a different risk profile. Generally speaking I would not advise people to hold bonds directly in a portfolio unless you are very familiar with this type of investment.


  • Registered Users Posts: 212 ✭✭ Mach 3


    Pussyhands wrote: »
    So I've read a bit about these but not fully understanding them.

    I understand when one issues a bond and the money is lent at an annual interest rate and the principal is paid out at the end.

    But how does the whole buying and selling of bonds work?

    Let's say there's a bond of €1,000 with a yield of 5%. That means there's an interest payment of €50 a year. I would have thought buying or selling the bond would mean you pay €1,000 + whatever value the bond is at depending on the interest rates in the banks. (i.e higher interests rates would make bonds less attractive as you could have your money earning better rates elsewhere. Likewise if the interest rates were lowered to say 1%, the value of the bond would increase because the % increase of the interest repayment would be greater than what it started out at)

    I'm just browsing bonds on degiro and there's a lot of 3-5% bonds. Would these not be a good way of making money?

    I don't understand what your after? You started off on this forum with a thread about buying property and since then you have been looking at everything and anything?

    If you are chasing yield without risk - bonds could be the way to go. If you would like to be a bit more adventurous, Turkey is paying 24% interest rate(a person of your stated financial position could fly over get a national security number and open a bank account, have a holiday while you are at it). If you want to flip a coin, Argentina are paying 60% interest rate.

    As I said it depends what you are after.


  • Registered Users Posts: 212 ✭✭ Mach 3


    A few links for starting out... https://www.boards.ie/vbulletin/showthread.php?p=96182995

    Not many responders for bonds on here over the years.


  • Registered Users Posts: 8,240 ✭✭✭ Pussyhands


    Mach 3 wrote: »
    I don't understand what your after? You started off on this forum with a thread about buying property and since then you have been looking at everything and anything?

    If you are chasing yield without risk - bonds could be the way to go. If you would like to be a bit more adventurous, Turkey is paying 24% interest rate(a person of your stated financial position could fly over get a national security number and open a bank account, have a holiday while you are at it). If you want to flip a coin, Argentina are paying 60% interest rate.

    As I said it depends what you are after.

    I'm sorry I'm not allowed to look into all the different types of investments?????


  • Registered Users Posts: 212 ✭✭ Mach 3


    Pussyhands wrote: »
    I'm sorry I'm not allowed to look into all the different types of investments?????

    Indeed you are.


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  • Moderators, Business & Finance Moderators Posts: 7,827 Mod ✭✭✭✭ Jim2007


    Mach 3 wrote: »
    If you are chasing yield without risk - bonds could be the way to go.

    Bonds just have a different risk profile to other investments such as equities and so. The are not even remotely close to risk free.


  • Registered Users Posts: 8,240 ✭✭✭ Pussyhands


    Jim2007 wrote: »
    Bonds just have a different risk profile to other investments such as equities and so. The are not even remotely close to risk free.

    So on degiro how do i determine the cost of a bond, it's yield and it's maturity date?


  • Moderators, Business & Finance Moderators Posts: 7,827 Mod ✭✭✭✭ Jim2007


    Pussyhands wrote: »
    So on degiro how do i determine the cost of a bond, it's yield and it's maturity date?

    Sorry no idea as I don’t use them.


  • Registered Users Posts: 212 ✭✭ Mach 3


    Jim2007 wrote: »
    Bonds just have a different risk profile to other investments such as equities and so. The are not even remotely close to risk free.

    https://www.statesavings.ie/our-products/10-year-national-solidarity-bond


  • Registered Users Posts: 11,168 ✭✭✭✭ Geuze


    Mach 3 wrote: »

    This is not a bond, it is a deposit.

    They are using the term bond here, but it is a deposit.


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  • Registered Users Posts: 14,431 ✭✭✭✭ banie01


    As Jim2007 has mentioned bonds are not a risk free proposition.
    There are various categories of bond from Government to commercial and junk all have ratings and all have risk.

    Government issued bonds rated A+ and higher are often used for "certainty" but multiple risks are present that can cause even these to be risky.

    Bonds are traded at their "par" value, this accounts for the coupon price and expected interest returns.
    Bonds can trade below Par and above Par.
    They are a very niche and specialized investment area.
    A lot less risky than CFD or options trading but quite involved to get any other type of return above the T-Bill rate while mitigating risk.


  • Registered Users Posts: 212 ✭✭ Mach 3


    Geuze wrote: »
    This is not a bond, it is a deposit.

    They are using the term bond here, but it is a deposit.

    I should have put the link in my original post, where I mentioned "bond". Other than that I was talking about yield.
    I'm sure Jim007 and the OP are capable of reading between the lines


  • Registered Users Posts: 212 ✭✭ Mach 3


    Gone quite here? Anyhow OP, we have American government bonds (aka, Treasuries - 2 year, 10 year and 30 year the most watched) yields rising (price inversely falling) on the FED chair, two blow out economic data points this week already and another one expected tomorrow. Which leads to suggest that there will be a top slice rotation from equities into (US) bonds by big money managers that could quickly escalate on any European woes - namely Italy and Greece (bag holders - ECB).

    I'm not sure if there is others to engage on this thread for discussion, but keep asking anyway.


  • Registered Users Posts: 212 ✭✭ Mach 3


    Meant to put this up a while back. It is a few years old but does a simple job of explaining bonds. It leads on to other videos progressing a bit as it goes.






  • Registered Users Posts: 8,240 ✭✭✭ Pussyhands


    Bump.

    Still don't understand how to do it.

    You see talks of US treasuries paying 3/4%...how do I get this?


  • Moderators, Business & Finance Moderators Posts: 7,827 Mod ✭✭✭✭ Jim2007


    w
    Pussyhands wrote: »
    Bump.

    Still don't understand how to do it.

    You see talks of US treasuries paying 3/4%...how do I get this?

    What do you mean, how do I get this.... you either buy the bond or subscribe to it at issue depending on the bond.


  • Registered Users Posts: 8,240 ✭✭✭ Pussyhands


    Jim2007 wrote: »
    w

    What do you mean, how do I get this.... you either buy the bond or subscribe to it at issue depending on the bond.

    Where are these in Degiro?


  • Moderators, Business & Finance Moderators Posts: 7,827 Mod ✭✭✭✭ Jim2007


    Pussyhands wrote: »
    Where are these in Degiro?

    Sorry as I have already said I don’t use Degiro. Remember that bonds are not traded on an exchange, contact them directly and see if they have access to a brokerage that cover the issue you want to buy.


  • Registered Users Posts: 212 ✭✭ Mach 3


    Corporate giants doing business abroad are painting a dreary picture of the world’s economy…This week, top executives at FedEx, BMW, UBS and others described bleak global business conditions while discussing quarterly results. Fitch Ratings also “aggressively” cut its forecast for the year.

    The head of UBS was among the latest to blame the world’s backdrop for weaker-than-expected results. CEO Ermotti told a conference in London on Wednesday that it “one of the worst first-quarter environments in recent history,”
    https://www.alhambrapartners.com/2019/03/21/the-real-end-of-the-bond-market/

    A good article. The US bond market is screaming higher, as too is the equities market. Are they both right?


  • Moderators, Business & Finance Moderators Posts: 7,827 Mod ✭✭✭✭ Jim2007


    Mach 3 wrote: »
    https://www.alhambrapartners.com/2019/03/21/the-real-end-of-the-bond-market/

    A good article. The US bond market is screaming higher, as too is the equities market. Are they both right?

    It really does not matter one way or the other unless are going to try and speculate or invest in a derivative product based on bond prices. Investors know or should know that the major part of portfolio performance comes from asset allocation, that should be our concern, not what the market will do in the next few years.

    Determinants of Portfolio Performance


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  • Registered Users Posts: 212 ✭✭ Mach 3


    Jim2007 wrote: »
    It really does not matter one way or the other unless are going to try and speculate or invest in a derivative product based on bond prices. Investors know or should know that the major part of portfolio performance comes from asset allocation, that should be our concern, not what the market will do in the next few years.

    Determinants of Portfolio Performance
    Jim, were we all running a multi billion portfolio, we wouldn't be posting here. Having said that those that do run portfolio it does matter about asset allocation, and are not going to hold on to losing positions for years. Rebalancing happing now.
    Rhetorical question by the way!


  • Moderators, Business & Finance Moderators Posts: 7,827 Mod ✭✭✭✭ Jim2007


    Mach 3 wrote: »
    Jim, were we all running a multi billion portfolio, we wouldn't be posting here!

    All the more reason that you should be concentrating on asset allocation rather than trying to stock/bond pick, you don't have either the resources nor the skill to do so. At the end of the day it is your money and your choices.


  • Registered Users Posts: 212 ✭✭ Mach 3


    Jim2007 wrote: »
    All the more reason that you should be concentrating on asset allocation rather than trying to stock/bond pick, you don't have either the resources nor the skill to do so. At the end of the day it is your money and your choices.

    Any suggestions as to how to improve my skills Jim? To be honest I'm sick of being lucky 🍀 all the time.
    (very seldom pick stocks/bonds)


  • Registered Users Posts: 8,240 ✭✭✭ Pussyhands


    Mach 3 wrote: »
    https://www.alhambrapartners.com/2019/03/21/the-real-end-of-the-bond-market/

    A good article. The US bond market is screaming higher, as too is the equities market. Are they both right?

    Still doesn't answer my question about how they work. I see this "bonds yield 3.5% " etc. My understanding was you buy a bond, you get a 3.5% return a year.


  • Registered Users Posts: 212 ✭✭ Mach 3


    Pussyhands wrote: »
    Still doesn't answer my question about how they work. I see this "bonds yield 3.5% " etc. My understanding was you buy a bond, you get a 3.5% return a year.

    Have a stab at it, after all its nearly six months since you asked the question.... Before the new rectum operation starts.


  • Registered Users Posts: 11,168 ✭✭✭✭ Geuze


    Pussyhands wrote: »
    Still doesn't answer my question about how they work. I see this "bonds yield 3.5% " etc. My understanding was you buy a bond, you get a 3.5% return a year.

    There can be three % associated with each bond.

    If the name of the bond is something like "Treasury 2030 4%", and you buy it, then no, you will not earn 4% pa.

    That 4% is the coupon.

    So the bond will pay 4.00 euro interest for each 100 euro bond, yes.

    But to buy that bond today may cost 120.

    So you will earn a running yield of 4/120, or 3.33%.

    But you will also face a 20 capital loss at redemption, so the yield to maturity YTM will be much less.


  • Registered Users Posts: 8,751 ✭✭✭ Shedite27


    Everything I read about investing has advised that I should be putting 15-30% of my investments in funds. Do people actually do this? Seems like there should be more talk of it on here if it was a common strategy.

    Secondly, for those that use them, are they buying them at issue or on the secondary market? I can see plenty of the secondary market on Degiro, but where does one find out about bonds available at issue?


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