Investing in Bonds (PART 1).

A bond represents a loan made by an investor to a borrower. The borrower is typically government or corporate institution. Governments borrow from investors through treasury bonds while corporate institutions borrow from the investing public through corporate bonds. Proceeds from bonds are used by government and corporate institutions to finance operations and projects. Bond holders are considered creditors of the bond issuers. Raising capital through bond issuance is an alternative to bank loans for corporate and governments.

Details of bonds include start date that is the date the bond is issued and interest starts to accrue on the bond, maturity date which is the date the bond matures and principal amount is paid to the investor, coupon rate which is the interest payable on the bond, coupon payment date which is the date coupons shall be paid. Other details include whether coupon rate is fixed throughout the life of the bond or coupons are pegged to a reference rate and may therefore change during the life of the bond. Bonds may also be callable giving the issuer the right buy back bonds from investors at an agreed discount rate.

Bonds are commonly referred to as fixed income investments and they fall in the same asset class with fixed term deposit. Most corporate bonds are publicly traded. In Ghana the market for trading bonds is the Ghana Fixed Income Market (GFIM). A bond investor does not need to hold a bond all the way to maturity. Initial bondholders can sell to other investors on GFIM. Some corporate bonds that trade on GFIM include Bayport Financial bonds and Izwe Loans bonds. Government of Ghana bonds are also traded on GFIM.

The initial price of most bonds are usually set at par at GHS 100, GHS 1,000 or GHS 10,000 face value per bond. The face value of the bond is what will be paid back on maturity. The market price of the bond depends on a number of factors which includes the credit quality of the issuer, the coupon rate compared with the general interest rate in the market and the length of time to maturity.

Disclaimer

This weekly report is the copyright of NIMED Capital Ltd. (NIMED), an investment banking company licensed and regulated by the Securities and Exchange Commission (S.E.C.) of Ghana as Investment Advisers as well as the National Pensions Regulatory Authority (N.P.R.A.) as an approved Pension Fund Manager. Information and opinions herein have been compiled or arrived at based on information obtained from sources considered reliable; we therefore do not hold ourselves responsible for its completeness or accuracy. All statements of opinion, projections, forecasts, or those relating to expectations regarding future events or performance of investments represent NIMED’s own assessment and interpretation of information currently available to NIMED which are subject to change.