Tuesday 09 December 2014 by Elizabeth Moran Education (basics)

Busting the seven key myths about bonds - Part 6

Over the last 15 years, the FIIG team has had thousands of conversations with investors who are considering investing in bonds and other fixed income investments.

We’ve come to recognise some key concerns that investors quote when discussing a potential investment, most of which are based on false assumptions. So, if you’re still unsure about bonds, this series of articles which delves into the “Seven Key Myths” may help.

Myth #6 There is too long to wait until maturity

Reality #6 Once bonds are issued they are traded in the secondary market. You can buy bonds that are close to maturity, say with one or two years to go. You don’t have to buy new issue bonds.

Bonds can be issued with very long terms to maturity, some have 20, 30 or even 50 years until they mature and capital is repaid to you. Don’t be put off by the long terms. Here is the list of reasons why:

  1. The over-the-counter bond market is huge and it is estimated that the global market is double the size of the global share market. In Australia, we estimate the bonds issued in Australian dollars are worth $1 trillion. If you include the bonds Australian companies issue in foreign currencies, like US dollars, the size jumps to $1.5 trillion.
    This big market trades very large volumes of bonds every business day. You can typically sell your bonds at short notice and access your funds.
  2. One of life’s great unknowns is how long you will live. Experts agree that life expectancy is increasing and longer dated bonds will provide protection that you don’t run out of money. Just about everyone I know knows a healthy nonagenarian (someone aged 90 to 99 years).
  3. Because bonds are tradeable you can buy them when they are close to maturity. If you don’t want to invest in anything greater than say two or three years, there are still many options available.
  4. Longer dated fixed rate bonds will show the greatest price movements when interest rates fall. They are very protective and should be considered in certain economic circumstances.

Reality #6 Once bonds are issued they are traded in the secondary market. You can buy bonds that are close to maturity, say with one or two years to go. You don’t have to buy new issue bonds.

Bonds can be issued with very long terms to maturity, some have 20, 30 or even 50 years until they mature and capital is repaid to you. Don’t be put off by the long terms. Here is the list of reasons why:

  1. The over-the-counter bond market is huge and it is estimated that the global market is double the size of the global share market. In Australia, we estimate the bonds issued in Australian dollars are worth $1 trillion. If you include the bonds Australian companies issue in foreign currencies, like US dollars, the size jumps to $1.5 trillion.
    This big market trades very large volumes of bonds every business day. You can typically sell your bonds at short notice and access your funds.
  2. One of life’s great unknowns is how long you will live. Experts agree that life expectancy is increasing and longer dated bonds will provide protection that you don’t run out of money. Just about everyone I know knows a healthy nonagenarian (someone aged 90 to 99 years).
  3. Because bonds are tradeable you can buy them when they are close to maturity. If you don’t want to invest in anything greater than say two or three years, there are still many options available.
  4. Longer dated fixed rate bonds will show the greatest price movements when interest rates fall. They are very protective and should be considered in certain economic circumstances.

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