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What are bonds, how do they differ from stock investments, and what are the most important considerations when investing in bonds?
Tamar Uriel-Beeri, Managing Editor of jpost.com, interviews Adiel Weiss, a Fixed Income Analyst with Bank Hapoalim, and discusses the ins and outs of bonds, their significance and the best long-term strategy to maintain when purchasing them.
Weiss 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. Bond owners are considered debtholders, or creditors, of the issuer. Bonds are fixed-income securities and provide returns in the form of regular interest payments and repayment of the principal when the security reaches maturity.
When bond markets drop and bond prices go down, he explains, the yield goes up. When that happens, he says, “Bonds become much more interesting to invest in.”
Riskier bonds that may have price volatility usually yield a higher rate of interest than conservative, less-risky bonds, says Weiss. He notes that government bonds are generally safer investments than corporate bonds 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.
Weiss says that when it comes to investments, the name of the game is diversification, and bond investors should invest in more than one type of bond. The basic level of bond investment is in government bonds – both nominal and inflation-linked bonds. Above it, he says, is a layer of investment-grade corporate bonds from highly-rated companies. Bonds can also be diversified, he adds across different sectors, such as technology, health care and other areas. Investors with foreign currency accounts can invest in bonds abroad in other currencies, such as dollars and euros.
“The name of the game,” says Weiss, is to have a diversified portfolio of both nominal and inflation linked-bonds with a wide range of exposure in different sectors.”