Benefits associated with Investing in Bonds The Zimbabwe securities market offers both equity and debt instruments to investors. Like equities, debt securities can also be traded on the securities exchange. Below is a list of some of the merits associated with investing in bonds:
Bondholders get paid off first before the equity holders upon liquidation of the underlying company and they are first in line to receive new securities, cash or a mixture or both should reorganization of the business occur.
Bonds have guaranteed income based on predetermined terms and conditions. They therefore offer a relatively higher degree of certainty in income than equities.
Coupon payments from bonds are consistently distributed at regular intervals hence bonds provide a regular return to bondholders. Bonds typically have periodic interest payments thereby providing a steady and predictable return.
Since investments in bonds are based on predetermined terms and conditions, it becomes easier for bondholders to budget and plan accordingly.
Debt markets offer a wide variety of bonds with different characteristics attached to them to suit different investor needs. Some types of bonds include fixed rate bonds, floating rate bonds, zero coupon bonds and convertible bonds. Some bonds are tax exempt which is an excellent investment option for high tax bracket investors.
Bonds (especially short and medium term) are less volatile relative to equities. Bonds can therefore stabilize the value of an investor’s portfolio during times when the stock market is providing negative returns. Bonds are generally viewed as safer investment havens than stocks.
The bond market is perceived to be more liquid given the ability to sell a bigger block of bonds without significantly affecting the market price.
There is relatively more legal protection to bondholders which comes through the underlying indenture and covenants
Bonds are considered less risky hence more secure than equities as most Governments rarely default.
Investing in bonds enables portfolio diversification and preserves value.