Invest in an extensive range of domestic and international Government and Corporate Bonds with Davy Select.
What are Bonds?
Put simply, bonds are a loan. It is similar to an IOU because when you purchase bonds, you are lending money to the entity (normally a government, corporate or bank) who is issuing the bond (issuer). The issuer is generally obliged to pay interest at set intervals (coupons) over the bond’s life (term) and then repay the principal amount (nominal or face value) when the bond matures. This is why they are referred to as a fixed income investment. So a bond has similar features to term deposits in this respect.
A bond can be bought and sold on the secondary market, subject to there being sufficient liquidity in the market. The value or price of a bond may fluctuate due to a number of factors such as interest rate movements and the perceived credit worthiness of the issuer.
A government bond is a bond issued by a national government usually denominated in the country's own currency. Davy Select gives you access to government bonds including those issued by Ireland, UK, Europe and the US.
Corporate bonds are issued by companies ranging from large institutions with varying levels of debt to small, highly leveraged, start-up corporations.
The most important difference between corporate bonds and government bonds is their risk profile. Corporate bonds usually offer a higher yield than government bonds because their credit risk is generally greater. This is not always the case, however, as we have seen more recently.
Example of a Corporate Bond
Bank of Ireland 4% 01/2020: This is a Bank of Ireland bond with a 4% coupon which should mature in January 2020. For example, suppose you bought 100,000 nominal at a price of 100.00. This means that you should receive a coupon of €4,000 (4% of 100,000) every year until you sell the bond or else until the maturity date in 2020.
Examples of Government Bonds
Irish 5% 18/10/20: This is an Irish Government Bond with a 5% coupon that matures in October 2020. For example, suppose you bought 100,000 nominal at a price of 100.00. This means that you should receive a coupon of €5,000 (5% of 100,000) every year until you sell the bond or else until the maturity date in 2020.
DBR 2.50% 04/01/21: This is a German Government Bond with a 2.50% coupon that matures in January 2021. For example, suppose you bought 100,000 nominal at a price of 100.00. This means that you should receive a coupon of €2,500 (2.5% of 100,000) every year until you sell the bond or else until the maturity date in 2021.
Note, the prices quoted in the above examples will vary over the lifetime of the bonds.
Yield is the annualised return that is earned on a bond, based on the price paid and the interest payments received. There are many different ways to measure a bond's yield, the most common is yield to maturity. This is the total return an investor will receive by holding a bond until it matures, including all the interest received from the time of purchase until maturity, plus any gain or loss if the bond was purchased at variance to its par value.
It should be noted that a bond's price will fluctuate during its lifetime and that this will impact its yield. A bonds yield moves inversely to its price. When a bond's price rises, its yield decreases and conversely when a bond's price falls, its yield increases. From the above example, of the Irish 5% 18/10/20, if it is purchased at 100 (PAR) per 100 nominal it will have a yield to maturity of approximately 5.00%. However if it is purchased at a discount, for example 90 per 100 nominal the yield rises to approximately 6.31%.
Investing in Bonds is not without risk. Bond prices can be volatile. The overall market may fall, or the Bond that you invest in may perform badly. The value of your investment may go down as well as up. Past performance is no indication of future performance. Investments denominated in a currency other than your base currency can be affected by exchange rate movements when converted back to the base currency.
Credit Risk: This is the risk that an issuer will be unable to make interest or principal payments when they are due, and therefore default. Rating agencies such as Moody’s, Standard & Poors (S&P) and Fitch assess the credit worthiness of issuers and assign a credit rating based on their ability to repay its obligations. Fixed income investors examine the ratings of a company in order to establish the credit risk of a bond. Ratings range from AAA to D. Bonds with a ratings at or near AAA are considered very likely to be repaid, while bonds with a rating of D are considered to be more likely to default, and thus are considered more speculative and subject to more price volatility.
Inflation Risk: Inflation reduces the purchasing power of a bond’s future coupons and principal. As bonds tend not to offer extraordinarily high returns, they are particularly vulnerable when inflation rises. Inflation may lead to higher interest rates which is negative for bond prices. Inflation Linked Bonds are structured to protect investors from the risk of inflation. The coupon stream and the principal (or nominal) increase in line with the rate of inflation and therefore, investors are protected from the threat of inflation.
How to Buy Bonds
Bond orders must be placed over the phone with our Execution Desk, rather than online. You can place bond orders with our Dealers from 8am to 9pm Monday to Thursday and 8am to 8pm on Fridays. Call 01 614 8900.
Commission costs are 0.50% of the transaction value, subject to minimum commission of €100 per bond.
Not sure where to invest?
If you are in doubt as to the suitability of any investment for you, you should seek independent advice. Davy Select is an execution-only platform meaning that you are responsible for all investment decisions. Advisory and Discretionary services are available separately through Davy Private Clients. Please click here to be redirected to Davy Private Clients.
Call today 01 614 8900.