I have 15,000 EUR and I don’t know what to invest the money in. Maybe Corporate bonds?
What are corporate bonds? No matter if you are a beginning investor or you would just like to diverse your investment wallet it is worth to analyse deeply this topic. They are so called securities. They are issued by specific enterprise, which wants to gather resources for a certain purpose e.g. their development. Investor, who is the buyer of such a bond is lending enterprise their money which makes that company a debtor. Enterprise that is a debtor needs to give the money back to the investor in a morbidity date with interests.
This solution construction is not complicated. The company issuing bonds is obliged to describe whole procedure in details. Reading this procedure is obligatory before making a decision. We will find among others issuer indication, goals and issuing volume, nominal value, issuing price of bonds, interest rates details, frequency of interests payments and the date of buy-out. Such information allow to assess the company, which is not yet listed on the stock exchange market, but offers an attractive rate of return.
Certainly, paying attention to interests offered is crucial. Available offers differ at least by the proportion of interests and their counting system. There are even some of them that do not guarantee any interests. They are so called zero-tokens which means bonds with a discount agreed in advance. They can be bought by the lower price than their nominal value is. In case of their buy- out, the investor receives nominal value of such a bond. Interests are also not paid after capitalization period. Therefore, what is a profit for investor? The only profit is the difference between purchase price and nominal value.
We assume though, that profit will be bigger than mentioned difference. In such situations we rather choose offers with fixed or flexible interest rates. Fixed interest rate guarantee interests charge and interests payment fixed value independently from economic situation. We can forecast easily our profits from such investment. Flexible interest rate is dependent from certain parametre, which decides about bond’s interest. Most common parametres are Warsaw Interbank Offered Rate (WIBOR) plus agreed upon margin. The choice should depend on the market and economic situation. If interest rates or inflation are increasing it is worth to choose flexible interest rate. However, when we expect inflation and ineterst rates decrease locating capital from offer with fixed rates will be more profitable choice. It needs to be taken into account that because of dynamics and development of the market there is always some risk.
Corporate bonds can be either bought on the primary or aftermarket. What is more we can buy them from a public or private offer if on primary market. On the primary market we buy freshly issued bonds. On the aftermarket we buy-out from the primary buyer, who is not able to wait until the end of the period that they were issued for.
Is it worth to locate our free money resources in corporate bonds? Yes, it is. We invest relatively safe with a low risk. It needs to be remembered that our first steps on the shares market we should be careful and verify issuer thoroughly. We need to analyse their market situation and protection solutions they offer. If we follow that path the success chances are huge.
Author: Grzegorz Szulik, CEO od Provema Finetech.