Wednesday, August 19, 2009

Investment in Bonds - Another Window of Opportunity

Today is the day to shake off the shackles of the past and to move forward. Today was once the future from which you expected so much in the past. Don’t let what you have within your grasp today be missed entirely because only the future intrigued you, and the past disheartened you. It is okay to take time to plan, but when the time of action has arrived, stop thinking and o for it. The regret that most people experience in life come from failing to act when they have an opportunity.

Every obstacle introduces a people to themselves. How we respond to those obstacles is important. The greatest example of the right response to an obstacle in the Bible is the giant Goliath, who confronted and intimidated the armies of Israel, including the brothers of a young shepherd named David. David’s brothers chose not to do anything about the obstacle before them, but David did. What was the difference? The way each viewed the problem. The brothers looked at the obstacle and figured it was too big to hit, but David looked at the obstacle as an opportunity and figured it was too big to miss. While David’s brothers were seeing a problem, David was seeing an opportunity. You need a second eye and the Grace of God to be able to see things differently.

Do you see the global meltdown as an obstacle too big to hit or an obstacle and opportunity too big to miss? The way you look at any event in your life makes all the difference. That many people have lost their life savings through various investments in the stock markets, mutual funds, multi-level marketing etc is not news; many people have also made huge sums of money through similar investments during the same period. Do you see the meltdown as an opportunity or an obstacle? Do you see yourself as a victor a victim?

Is it not amazing that many people decide in advance that they are going to fail and not reach their dreams. It is not because things are difficult that we do not dare, it is because we do not dare that things are difficult. The way to guarantee success is to work smarter and harder. Naturally, in a sluggish economy or a recession, people try to watch their spending and not take any undue risks that might put their future financial goals in jeopardy. The global meltdown indeed brought untold hardship to many investors. However, Investment Analysts are of the view that Bonds guarantee steady and safe returns compared to other forms of investment. The downturn in the world economy has indeed led people to explore other investment windows like Bonds. The Bond can be best described as a debt security in which the authorized issuer owes the holder a debt and depending on the terms of the Bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond could literally be described as a loan, the bond holder is the lender, and the coupon is the interest. A bond could also be described as fixed financial assets issued by governments, companies, banks, public utilities and other large entities to raise money from investors. The bondholder do not share from the profit of the company, however their fixed return is guaranteed and the date of payment is certain.

The following types of Bond were exhaustively discussed by Iheanyi Nwachukwu – Businessday Newspaper:

Corporate Bond – A Corporate Bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money for developmental projects. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. Sometimes, “the term corporate bonds” is used to include all bonds, except those issued by governments in their own currencies.

Government Bond – A government bond is a bond issued by national governments in the country’s own currency. The first-ever government bond was issued by the English government in 1693 to raise money to fund a war against France. It was in the form of a tontine. Government bonds are usually referred to as risk-free bonds, because the government can raise taxes to redeem the bond at maturity.

Sovereign Bond as a Government Bond – A sovereign bond is a bond issued by a national government in foreign currencies. Nations with very high or unpredictable inflation or with unstable exchange rates often find it uneconomic to issue bonds in their own currencies and so are forced to issue bonds denominated in more stable foreign currencies. This raises the issue of sovereign default if the nation cannot afford to repurchase the necessary foreign currency at bond repayment time. Due to the risk of default, investors require the bonds to be issued with a higher yield. This makes the debt more expensive to service, increasing risk of default. In the event of default, unlike a corporation or even a municipal subdivision, a nation cannot file for bankruptcy. But on the rare occasions that a default occurs, just as in defaults on corporate bonds, recent practice has been that the defaulting borrower presents an exchange offer to its bond holders in an effort to restructure the sovereign debt, as has been the case in US dollar denominated bonds issued by Peru (1996) and Argentina (2001). However, getting the bond holders to accept an exchange offer has become very difficult, something caused by the holdout problem.

Municipal Bond – A municipal bond is a bond issued by a city or other local governments, or their agencies. Potential issuers of municipal bonds include cities, counties, redevelopment agencies, school districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) below the state level. Municipal bonds may be general obligations of the issuer or secured by specified revenues. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.

Thomas Edison once said that "Opportunity is missed by most because it is dressed in overalls and looks like work.". Martin Luther King Jr. advised that “If you lose hope, somehow you lose the vitality that keeps life moving, you lose that courage to be, that quality that helps you go on in spite of it all. And so today I still have a dream."

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