Alroy Commentary - How can you generate return from Bond Investment?
In investment world, equities (stocks), fixed incomes (bonds) and cash equivalents (money market instruments) are three traditional asset classes for investors. For balanced and conservative investors, fixed incomes are always included in their portfolios as investment professional tell them the risks in investing fixed incomes are lower than equities. Nonetheless, do you really know what is fixed incomes?
Simply speaking, a bond is a contract between investors and the issuer. Investor agrees to loan money to issuer (Companies or Governments) for a predetermined interest rate within a specific time period.
By investing in bonds, you can generate return from the following aspects -
1. Interest - In a normal circumstance, the issuer agrees to pay investors on a predetermined rate regularly. Interest income is the main income source for bond investment.
2. Change in Exchange Rate - If investors invest in the bond which is denominated in the foreign currency, investors can get extra income if the foreign currency appreciates against home currency. Of course, if foreign currency depreciates, investors would incur loss.
3. Price Movement - If investors sell the bonds in the secondary markets before the maturity date, he or she can get extra return if the market price is higher than the buy-in price, vice versa.
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