Economic Wisdom to Apply in Your Twenties

Chapter 41

Chapter 5 Section 5 No matter how conservative people are, they are not afraid to invest in bonds
Bonds are issued to investors when the national government, financial institutions, enterprises and other institutions directly borrow money from the society to raise funds, and promise to pay interest at the specified interest rate and repay the principal according to the agreed conditions.

Among the dazzling array of financial investment products, bonds have become an ideal investment object in the minds of many young investors due to their advantages of low risk, stable income and strong liquidity, especially for young investors who lack investment experience and pursue prudence Bonds are a more attractive investment tool.

Among many investment tools, bonds are very attractive, because bonds are different from high-risk stocks, and they are safe and suitable for conservative investors.National debt is issued by the state to raise funds for economic construction. It is guaranteed by national tax revenue, safe and reliable, and the principal will be repaid at face value when it matures.It is precisely because of its high security that investors use it to pledge loans to banks, and its credit rating is much higher than that of high-risk financial assets such as stocks.In this way, investors can continuously expand their credit and engage in larger investments.At the same time, bond operations are highly flexible.With bonds in hand, when the interest rate is bearish, you can enjoy the price difference of the bond price rise; when the interest rate rises, you can sell the bonds with a lower coupon rate in your hand, and then buy the newly issued bonds with a higher coupon rate.If the interest rate does not change, there will still be interest income.In addition, the liquidity of bonds is also high, and investors can directly enter the market for transactions if they need it, and they can buy and sell freely.

Based on the above-mentioned advantages, many investors have focused their attention on bonds, and recognized them as the first choice for family investment and financial management.

The treasury bond market is rich in varieties, with short-term and medium-term maturities; interest-bearing and discounted interest rate calculations; paperless (book-entry) and paper-based (certificate) types of bonds .Faced with a variety of national debt investment products, personal investment in national debt should be planned and arranged according to the circumstances of each family and each individual, as well as the long and short term of funds.For young people in their twenties investing in bonds, experts have the following advice:

1. If you have short-term idle funds, you can buy book-entry treasury bonds or bearer treasury bonds.Book-entry treasury bonds and bearer treasury bonds are all types of bonds that can be listed and circulated. Their trading prices follow the market and can be sold (realized) through trading venues at any time during the holding period.Therefore, investors can turn "debt" into "money" in time when they need money urgently.

2. If some single young people have no plans to get married in the near future and have idle funds for more than three years or longer, they can consider purchasing medium- and long-term treasury bonds.Investing in treasury bonds with a longer maturity can earn more income.

3. If you are married and have children, you are relatively conservative in investment and want to take the safest storage method, you can buy certificate-style government bonds or book-entry government bonds.Its form is similar to savings deposits in banks, but the interest rate of government bonds is slightly higher than that of savings deposits in the same period.

4. If you can frequently and conveniently see the market conditions of government bonds, and if you are interested and able to pay attention to the trading conditions of government bonds, you can buy book-entry government bonds or bearer government bonds, and actively participate in "bond market transactions".Since the fixed income of treasury bonds is guaranteed by the national reputation, and the state will repay the principal and interest when it matures, treasury bonds have the advantages of "low risk and stable returns" compared with stocks and various corporate bonds.

Wisdom Pieces: Investing in national debt is also risky

1. Interest rate risk.The longer the maturity of the bond, the greater the interest rate risk.If an investor buys long-term treasury bonds with an interest rate of 3%, and the interest rate rises to 5% shortly after holding it, even if the interest tax is deducted, a lot of interest income will be lost every year.Calculated with compound interest, the loss will be very considerable.

2. The risk of inflation leading to a decline in the purchasing power of money.During periods of inflation, the investor's real interest rate should be the coupon rate minus the inflation rate.At this time, even if the nominal interest rate does not rise, the bond also has the risk of depreciation.

3. Liquidity risk.Especially for long-term bonds, if there is an urgent need for money or a better investment opportunity is found, investors want to cash out in the short term but cannot find a buyer willing to pay a reasonable price for a while, so they must sell at a lower price.

(End of this chapter)