Bonds (of fixed income)

When an investor purchases a bond, he or she is lending money to a borrower. In return for the loan, the borrower promises to pay the investor a specified rate of interest (coupon) during the life of the bond and to repay the face value of the bond (the ʻparʼ value) when it matures.

What are the benefits of investing in Bonds?

1. Capital protection

The basic principle of bonds is the repayment of principal at maturity.

2. Income generation

A diversified bond portfolio can provide income with a lower level of risk than shares, and may offer higher income than cash and term deposits.

3. Diversification

Bonds also help reduce volatility and preserve capital, especially when combined with exposure to shares.

4. Interest rates

When interest rates fall an existing bond’s coupon rate will usually become more appealing to investors, driving the price up.

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