Bonds: The ballast to your investment portfolio
By Arney Tjaronda
BBA Student: Banking & Finance Major at the University of Namibia.
The title of this article itself, stirs up a lot of questions as to what it meant by bonds being the ballast to investment portfolio? In order to grasp the meaning of it, we have to get a deeper understanding of what bonds are.
Bonds are fixed- income investment securities that represents a loan made by an investor to a borrower (government or corporate). Many investors use them to strengthen their portfolio’s risk-return profile. Bonds assist by adding more diversification and reducing volatility that arises from the Namibian Stock Exchange market.
Bonds are used in by many professional investors as a long-term hedging security, especially when the economy goes through a recession/ financial crisis. Since most bonds are held on long-term, the borrower is obligated pay back investors when the bond’s maturity date comes to pass. A bond’s maturity is one of the considerations an investor outweighs against their investment goals and horizon. Investors must understand is that there are two types of bond types, the secured and the unsecured.
The former is a loan that has collateral in case the borrower cannot pay back and the latter is not backed by collateral, hence they are very risky to invest in. Bonds are paid in interest rates known as coupon rates and are calculated by dividing the annual payments by the face value of the bond. Discovering the right bond for your investment portfolio, takes up a lot time, experience and expertise and that is what we are going to look at.
Finding the right Bond on the Namibian Stock Exchange
Using the Namibian Stock Exchange (NSX) daily market report (June 17,2021), the exchange has 52 listed government and corporate bonds. As of the year 2021, they issued N$52,740 (in millions) and trade, so far over 805 (in millions), yielding a percentage of 1.5%. Finding the right bond, one has too look at the bond rating done by different rating agencies. The Fitch Sovereign Rating and the Moody’s Sovereign Rating. Based of their report from December 2020.
In summary, Fitch has admitted that Namibia’s Long-term foreign-currency issuer has a negative outlook. Moody’s downgraded the long-term issuer and senior unsecured ratings of the Government of Namibia to Ba3, maintaining a negative outlook. One should also consider the tax status of each bond. Some bonds have capital gains which are not subject to taxation. Some bonds listed on the NSX can be paid off before it matures.
There is risk factor of the bonds one often needs to take into consideration. There is always the risk of the interest rate that is dependent on the repo rate of the country. If the interest rate increase, that is a sign of good returns when the bond yield to mature but when the interest rate decreases, that is a sign of negative returns on your bond’s yield to mature. Other risks like the repayment risks, credit/default risks are very essential when looking for bonds to increase the value of your investment portfolio.
Although there bond market is viewed with so much complexity, it is really just driven by the same risk/return trade-offs as the stock market. Once the investor has mastered the few basic measurements, they can be competent bond investors. But again, this is nothing but one man’s opinion.