HomeHome SearchSearch MenuMenu Our productsOur products

Want to invest in bonds? Here's how to weigh up your options…

by , 16 March 2015

Investing in bonds is generally a safer investment option to investing in shares. But this doesn't mean they don't come with risks.

If you're looking to buy into different bonds, how can you compare them?

One way to do it is to use the yield spread.

Read on to find out more…


What is the yield spread?


The yield spread is the difference in interest rates (yields) offered by different bonds. It also works with other debt securities.

You could use the yield spread is you wanted to compared bonds that have different credit ratings, different maturities or are from different countries.

Using the yield spread allows you to assess whether a particular bond is a decent investment option. By using the yield spread between two bonds, you can weigh up how risky they are.

Let’s see how it works with the help of an example…


How to use the yield spread


You decide to compare the yield spread of two different government bonds:

  • A ten-year German government bond with a yield of 0.4%; and
  • A ten-year Greek government bond with a yield of 10%.

The yield spread between these two bonds is 9.6% (or 960 basis points). This shows you the Greek bond is much more risky than its German counterpart.

This is because Greece is struggling with a much weaker economy that Germany. And the Greek government has much more debt.

In other words, there’s a higher chance the Greek government won’t pay the interest on the bond or repay the original bond amount.

Add to that the current financial goings on in Greece and you can see why it’s looking like a risky investment.

So for Greece to attract investors to buy its bonds, it has to compensate for this by offering a much higher interest rate than Germany.

Professional bond investors use yield spreads to watch for signs of economic distress. And as a way to check if a bond is looking cheap or expensive.

So there you have it. How to weigh up your options if you want to invest in bonds.

*********** Hot off the press ************

What you’re about to read will turn everything you believe about achieving financial security upside-down!

You see, I have unlocked the key to achieving financial freedom. The key that could bank you up to R320,000 in the next 12 months. The key that could finally help you live the life you want to live.

And it’s not the typical hogwash and empty promises you see advertised every day.  My step-by-step instructions will help you to never rely on your salary again… You might even be able to tell your boss to ‘shove it’!

Discover how you can achieve financial security today.

*************************************



Want to invest in bonds? Here's how to weigh up your options…
Rate this article    
Note: 5 of 1 vote

Related articles



Related articles




Trending Topics