How to make money on bonds: forecasts and analysis of the bond market, bond yield

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

How to make money on bonds? The question is relevant for many. After all, buying bonds is considered a profitable investment. However, the number of people who understand this topic is still small. It would seem that the question of how to make money on bonds should have a simple answer. After all, in fact, it is a security in which profit is already embedded. But in practice, everything turns out to be somewhat more complicated. This is why novice investors need to carefully study how to make money on bonds before investing.

Target

What are bonds for? It is important to answer this question in order to understand their essence. Where do those who plan to borrow money usually go? As a rule, to a banking organization.

Imagine there is a company that needs money. She can also go to the bank. But he prefers the alternativeissue bonds, sell them, and receive money in return. At the same time, after a certain period, the owners of securities can get their money back with a certain profit.

Who issues bonds?

• Municipalities, that is, local authorities.
• Corporations
• State.

Depending on who issued the bonds, they get the appropriate name. Novice investors should pay attention to this in order to better understand the essence of the market.

Features

To better understand the essence of such an investment, you need to know the main characteristics:

• Face value. This characteristic is also called the word "value". This is the amount that will be paid to the owner at the end of the maturity.
• Market price. This feature is constantly changing. It denotes the amount at which you can purchase a bond at the current specific moment.
• Maturity date. This is the period after which the owner will be able to exchange the previously purchased bond for its face value. Now you can understand how to quickly make money on bonds. To do this, you need to choose securities with a minimum maturity period.
• Coupon size. So called periodic payments to bondholders. Due to the regular receipt of coupons, the investor can receive passive income. The ideal option is to catch the moment when the refinancing rate will be high. This will allow you to purchase long-term bonds and have consistently high coupon payments for several years.
• Yield to maturity. This is perhaps the most important feature. It determines how much profit an investor can expect at maturity.

Having understood the above characteristics, every curious person will be able to understand how to make money on bonds.

What does profitability depend on?

This is the most important question among those who are interested in how to make money on bonds.

The yield of bonds is highly dependent on the refinancing rate. The easiest way to explain and understand is with an example.

Suppose the refinancing rate is ten percent. If bonds offer a yield of five percent, it is not profitable to buy such securities. That's why they're being sold at yields that equal or exceed the refinancing rate.

You need to understand that not all investors wait until the end of the repayment period. Some start selling bonds earlier. During the period of presence on the stock market, the price of a bond may change. It will be affected by the current refinancing rate. How does it happen?

Suppose the refinancing rate has halved. At the same time, previously purchased bonds will have a higher yield compared to current ones. However, this will increase their market price.

This rule works in reverse. If the refinancing rate increases, then the price at which bonds are sold will decrease. Noan investor will not want to hold securities whose yields have declined significantly.

Types of bonds

There is another important criterion that will allow you to dive deeper into the securities market. It also depends on how much you can earn on bonds. So, they are divided into interest and discount. You need to understand the difference before buying.

Discount bonds can be purchased for less than face value. At the end of the maturity period, the owner of the security will receive income. It will be the difference between the face value and the purchase price. The higher it is, the more you can earn on bonds.

The second variety is interest. Sold at face value or even higher. However, during the period until maturity, the owner will be regularly paid income.

You need to understand that the price of a bond may change during the holding period. Therefore, the owner has to decide whether to sell it or wait until the end of the redemption period and take the face value. This is always a certain risk, which deters many novice investors.

Forecasts and analysis of the bond market

For many people, especially those who are far from the stock market, all this seems incredibly complicated. They have a more pressing question: can you make money on bonds?

You need to understand that the reliability of the issuer affects the yield of securities.

If we talk about Russian government bonds, their average yieldis 10-11% per annum. A more favorable rate is offered by large companies such as Aeroflot, Russian Railways, etc. Investors can earn a profit of 12-14% per year.

If the bonds are offered by a lesser-known corporation, the rate can be as high as 18%.

Despite the fact that high numbers cloud the mind, you need to understand that at the same time they involve high risks. If you chase high profits, you can be left not only without it, but also without initial investments.

How to start making money on the exchange?

Shares, bonds and other terms should be familiar to a potential investor. After all, the better he understands the securities market, the higher the probability of making a profit. Moreover, the skillful use of bonds allows you to create a reliable and stable source of income.

So, if everything is clear with attractive prospects, we need to consider a more pressing issue. How to start earning on bonds?

You can buy many of them on the Moscow Exchange. It is better for a private investor to act independently. This method is cheaper than others.

First of all, you need to find a broker who will provide access to the bond market. The next step will be bidding. You can conduct them yourself or entrust the broker, just giving him the appropriate order.

Starting Amounts

Many people think that to enter the bond market you need to own a lot of money. But it's not. Bonds often have a face value of justthousand rubles. You can buy only one security. This means you don't have to own millions to start investing in buying bonds.

After making a deal, you will have to pay a commission to the exchange and the broker. But it is usually no more than 0.1% of the turnover. This proves once again that the stock market is accessible to most people who have even a little free money. This is enough to get started. Of course, you won’t be able to get big incomes in this way, but this will allow you to understand the stock market and understand whether this way of investing is right for you.

Beginner investors are often afraid to buy bonds, believing that bank deposits are safer, although they offer a lower interest rate.