how to invest in bonds

Long time ago, my mother always taught me to keep my money rather than buying unimportant things and deposit the amount to my savings account.

As days go by, saving money became part of my daily habit. Everytime my parents give me my daily allowance, I always keep the 50% of that and deposit it to my savings account.

At the end of the month, I always check and analyze my savings passbook. That time before my graduation, I tried to open my passbook because I never opened it since my last deposit. After opening it, I was totally flabbergasted when I saw the total balance. I just smiled and congratulated myself for achieving the goal I never made.

However, upon looking at the interest rate offered by the bank, I was totally disappointed. The bank offers an interest rate of 2% annually. I thought of what the f*ck. 

That time, I did a simple research on different investments and looked for the interest rates they offer. What standout from my research are stocks and bonds. However, at the end of the day, I chose to invest in bonds rather than stocks (You will find out below why bonds are better than stocks).

After that, I read too many guides on how to invest in bonds for beginners. After some weeks, I took the risk to withdraw some of my savings and invest them in bonds to diversify my money and at the same time to create a stable source of income.

Honestly, bonds are extremely amazing. Yeah it did gave me 10x return compared to the bank where I keep my savings. I’m currently enjoying its benefits and it’s really full of fun.

If you also want to earn more, and build wealth, you I highly recommend you to read this how to invest in bonds guide because this can change your life. I promise! 

Let’s begin!

What are bonds?

Bonds are simply loans. When you invest in a bond, you lend your money to a government, corporation, or organization.

how to invest in bonds

A bond is issued with a specific face amount or popularly known as principal. When you invest in a bond, it will pay you a certain rate of interest rate ranging from 5% to 30% annually depending on the type of bond. Usually, interest rates are paid to investors once or twice a year.

A single bond has its own maturity date. This is the period of time the company or organization will pay you back your principal plus the interest rates.

Most bonds have a maturity date of 15 years up to 50 years. However, many investors don’t like investing for more than 50 years. Instead, they invest for not more than 30 years.

Additionally, when you invest in a bond that has a maturity date of not more than 10 years, we call those bonds as short term bonds. On the other hand, when you invest in a bond that has a maturity date of 10 years or longer, those bonds are called long term bonds.

So if a corporation or government issued a $5,000 bond that pays you an interest rate of 10% annually, that corporation or government will give you an interest of $500 a year or $250 twice a year. When the bond matures, they will give you back your principal.

Therefore, the longer the maturity date, the greater the interest rate you will receive.

In short, investing in bonds is safer than stocks because it includes minimal risks. If you’re not good in stocks, this option is the best for you. 

Additionally, bonds are regulated by the Securities and Exchange Commission (SEC).

So far, so good?

3 Types of Bonds

1. Government Bonds

Government bonds are bonds that are issued by the government and is known to be the safest type of bond. They issue bonds to finance different projects like infrastructures, schools, roads, and so on.

2. Corporate Bonds

Corporate bonds are bonds that are issued by companies and is considered to be the most riskiest of the three type of bonds. Corporations issue bonds whether to expand their business in some other countries, buy more equipments, increase products, or buy more properties.

3. Municipal Bonds

Municipal bonds are bonds that are issued by the cities, states and municipalities. These bonds are used to raise money for either the day to day needs (schools, roads) of the people or for specific projects (buildings, bridges).

Municipal bonds are less risky than corporate bonds. On the other hand, interests on municipal bonds are exempted from federal income tax.

How Bonds Work

When a government, corporation, or municipal is in need of money to finance their new projects or any other developments, they issue bonds to investors rather than going to banks begging for loans.

Before they issue a bond, they first make an agreement on the terms of the bond (5 years or longer), interest payment to its investors, and the maturity date of the bond.

Once the bond is ready, it will now be directly issued to investors who are willing to invest in the projects. However, some other bonds are offered by different brokers just like the banks. 

Reasons Why You Should Invest in Bonds

There are some reasons why you should definitely invest in bonds. Here they are:

1.  Diversify Investments

Most common reason why investors invests in bonds is that they want to diversify their portfolio or investment. 

In the same way, if you have stocks, mutual funds, insurance, and commodities investments, why not take the risk to buy another investment? I believe [in my own opinion] that the more investments you have, the more steady income you will have in the future. However, you should take note that every investment includes risks.

In fact, bonds are better source of passive and steady income because they will always pay you an interest twice or once a year.

2. Safer than stocks

It’s absolutely true that bonds are safer than stocks. How?

First, when you invest in bonds, you don’t have to take a lot of effort and time to read books, articles, or any reading materials about such investment. For me, one or more books is totally enough. 

On the the other hand, when you invest in stocks, you have to read many books or any reading materials for you to become a successful investor in the world of stocks. You also have to perform technical and fundamental analysis if you want to gain more profits from stocks.

Second, payments of interests are guaranteed and is paid to investors once or twice a year. In stocks, a company may stop issue their dividend payments to investors for some reasons. Another reason why bonds are safer than stocks is that when the company is poorly managed, there is a possibility that it may go bankrupt resulting to loss of capital.

The choice is yours!

3. More Income

Many investors and individuals invests in bonds to make more income. They don’t want to have a single source of income that is why they invest in bonds to gain more profits.

You should take note that the higher the amount you invest in a bond, the higher you will get paid. Let’s take a look in this example.

Sam invested an amount of $5,000 to a municipal bond which pays him an interest of 10% annually. On the other hand, his friend Daniel invested an amount of $15,000 to a municipal bond that pays him an interest rate of $10 annually. Their bond investment both matures in 15 years.

Sam

Total Investment: $5,000

Interest Rate: 10%

Maturity: 15 years

Total Interest Payment: $7,500 + $5000 (principal)

Daniel

Total Investment: $15,000

Interest Rate: 10%

Maturity: 15 years

Total Interest Payment: $22,500 + $15,000 (principal)

As you can see on the solution above, Daniel gained more profits than Sam because he has a higher amount of capital. So, the higher the amount you invest, the higher your interest payment. Meanwhile, the higher the interest rate, the higher profit you will receive.

How to invest in bonds

Investing in bonds is very easy just like counting from 123. Before you invest in bonds, you should take note that there are few requirements needed before investing in a bond.

Requirements

✓2 Valid Government IDs (PhilHealth, SSS ID, PAG-IBIG ID, Driver’s License, Passport, Voter’s ID, etc.)

✓Tax Identification Number (TIN)

✓Some other documents provided by the bank

✓Initial Investment

Once you completed this mentioned requirements, a bank officer will assist you in filing other forms.

How much is the Investment

You should take note that this requirements only applies in the Philippines. If you’re from other countries, please check your bank’s official websites.

For government bonds, the minimum amount required is P5,000.

For corporate bonds, the minimum amount required is P50,000.

For municipal bonds, the minimum amount required is P10,000.

To know more on the required minimum amounts, please visit the official website of Bureau of Treasury (for government bonds). Meanwhile, for corporate bonds, please visit the official websites of the banks.

How to Build Wealth in Bonds Investing?

Bonds are considered to be the best investment rather than other investments. It doesn’t only guarantee you higher return of investment but it is also the best way for you to diversify your investment portfolio.

Building wealth in bonds is extremely easy. However, the problem in bond investing is the bond itself. Some other bonds are not so good that is why you have to be very careful when choosing a bond. Choose the bond that you know and never invest in toxic bonds.

When you invest in bonds, you are paid via interest rates which are paid once or twice a year. Interest payments are guaranteed and the only way you can make money in bonds. 

In short, choose a bond that offers a higher interest rate. An interest rate of 5% is better but an interest rate of 10% or higher is the best. Be mindful of the interest rates because those interest rates are the number one factor of your source of income in the world of bonds.

Is it Safe to Invest in Bonds?

While stocks is considered to be the most riskiest and volatile investment, bonds are the safest investment whether you’re a beginner or pro investor. It doesn’t require too much hard work compared to stocks.

The only risk when you invest in bond is the company. When the company declared bankruptcy, that’s the time you will lose your investment (capital). That is why be vigilant on choosing your bond. Don’t be pressured and don’t follow the trends. Take time to understand the bond first before buying your first ever bond.

Having enough knowledge will lead you to success you’ve ever wanted. 

List of Banks that Offer Bonds

There are a lot of different type of bonds offered by the banks that is why I highly recommend you to visit the bank and ask them regarding the bond you want to invest in.

Here the are the major banks in the Philippines that offer bonds to investors:

  • Landbank
  • Banco de Pro (BDO)
  • Security Bank
  • Bank of the Philippine Islands (BPI)
  • Chinabank
  • Development Bank of the Philippines (DBP)
  • RCBC
  • Metrobank
  • Unionbank
  • Phillippine National Bank (PNB

Quick Summary

  • Bonds are loans that are offered by a government, corporation, and municipality. Bonds are usually issued to finance new projects and other developments.
  • Bonds has three types: government bonds, corporate bonds and municipal bonds.
  • Bonds are safer investment compared to stocks. Bonds is the best option for conservative and beginning investors.
  • Bonds has its own terms, maturity date, and interest rate. Usually, bonds are paid once or twice a year.
  • The higher the amount you invest in bonds, the higher you will get paid.
  • Bonds that has a maturity date of not more than 10 years are called short term bonds. While bonds that has a maturity date of more than 10 years are called long term bonds.
  • To invest in bonds, you don’t need to have millions in your pocket. The minimum required investment is only P5,000.
  • Bonds are offered by major banks in the Philippines.
  • Invest in bonds to create wealth.

Conclusion

Investing in bonds is one of the best way to diversify your investment portfolio and to create a stable source of income. Bonds are the safest investments and is best suited for conservative and beginning investors.

Learning how to invest in bonds can change your life and eventually help you build wealth and increase your net worth. If you want to become successful, take risks and challenge yourself. Invest early for you not to regret in the near future! And never listen from the financial advices of the successful people.

I hope this article helped you learn how to invest in bonds and I hope you’ll soon start investing in bonds!

If you want more investing tips, investing guides and other personal finance tips, please join our newsletter to receive our latest and exclusive contents!

 

Reference:

Wild, Russell (2012). Bonds Investing For Dummies, 2nd Edition. Wiley Publishing, Inc.

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About Author

Hi! I'm Arris Gawe, founder and author of Finance Talk PH, a personal finance blog that helps young individuals achieve financial independence. Besides blogging, I'm also a financial literacy advocate, investor, and traveler.

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11 Comments

  1. Very informative! I had no idea that there were so many different types of bonds you could invest in! I am always looking for more secure investment opportunity. Thanks so much.

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