A bond is also known as a fixed-income instrument.
Issuing a bond is one way for a firm to borrow money from individual investors. The issuer typically offers regular interest payments and must repay bond holders the principal sum at maturity, which typically exceeds 12 months.
If the firm goes bust and assets are sold, bond customers will be paid before shareholders.
Why is it important?
Bonds provide regular fixed interest income to buyers. Their potential returns range from 2 to 5 per cent, which means bonds give a higher yield than bank deposits and money market funds.
The downside is that the returns may not keep pace with inflation. The issuer may also go bust and be unable to fork out the regular payments and principal upon maturity.
However, as they are considered a relatively safe and low-risk financial instrument, bonds can help bring stability to an investor's portfolio.
How much he buys would depend on his risk profile - the lower his risk appetite, the higher the percentage of bonds in the portfolio and vice versa.
So you want to use the term. Just say...
'My Dad's a retiree and has to be low-risk in his investments. He has quite a lot of bonds in his portfolio.'
Lorna Tan
This article was first published in The Straits Times on January 04, 2009.
