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Sunday, February 19, 17:00 Israel time
What are bonds, how have the pandemic and the economic crisis affected the bond market and what specific tips should investors consider when investing in bonds?
Tamar Uriel-Beeri, Managing Editor of jpost.com, interviews Effi Shkolnik, Bonds Analyst with Bank Hapoalim, and discusses the ins and outs of bonds, their significance and how they comprise part of our retirement portfolio.
Shkolnik explains that a bond is a type of commercial loan that individuals can buy from an issuer. Companies, municipalities and governments use bonds to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer. Bonds are fixed-income securities and provide returns in the form of regular interest payments and repayments of the principal when the security reaches maturity.
Riskier bonds that may have price volatility usually yield a higher rate of interest than conservative, less-risky bonds, says Shkolnik. Government bonds are generally safer investments than corporate investments, he notes, because the government can print money and has a stable economy that can support the bond. Corporate bonds, on the other hand, depend on the cash flow of the company that issues them.
Agencies that rate bonds will give a higher rating to government bonds than corporate bonds, and large firms with solid cash flow will receive a better rating than smaller companies with little cash flow. “The tip is to focus on higher-rate bonds,” says Shkolnik, “and not high-yield bonds, which most of the time have lower rates, because the risk is higher.”
Most pension funds, he adds, include fixed-income instruments, such as bonds, and frequently they make up between 60% and 70% of pension funds. Unlike the equity market, which can go up or down, bonds provide a fixed income that ensures a specific yield for a particular period of time.