This article will explain the basics of proper Bond Portfolio Management.
Bond portfolios contain a variety of investment bonds issued by various different corporations and governments. People often establish
bond portfolios with the intention of using bond interest payments as supplemental income. When you establish a bond portfolio, you can either concentrate on buying certain types of bonds or diversify your portfolio with a mixture of government, corporate and mortgage-backed bonds.
Bonds fall into four main categories:
Bond Portfolio Management is a technique or strategy used by Investors or Wealth management Companies to actively or passively manage & diversify the bond portfolios of their clients depending on their risk profile & return requirements.
Effective bond portfolio management involves basically timing the bond market knowing when to enter/exit, and the right proportion of low yield/ high yield bonds.
Bonds are rated by credit agencies according to their quality i.e. risk of default. Although Bonds are considered as safe investment assets, the measure of safety or ‘Credit Rating’ is basically just the likelihood of the bond issuer not paying back the money to the bond holder, for any reason.
This is why bonds issued by some entities are classified as ‘junk bonds’ while others with lower risk of default are relatively higher returns are classified as ‘Investment grade’ bonds.
Corporates or SMEs (Small – Medium Enterprises) rely on cash flow to expand their businesses. So they often have a huge chunk of cash put aside kept for capital expenditures. While having reserve cash is good, investing the money in ‘Safe’ assets that give higher returns than the banks is better than keeping the money in the bank.
Building a proper Bond portfolio is an avenue to get leverage on their investment in fixed income products at the same time maintaining quick access to the money.
Unlike a variable-income security, where yield changes based on some underlying measure such as short-term interest rates, the yield of a fixed-income security is known in advance. That’s why bonds are also known as “fixed-income” investments, they are intended to provide you a steady payout or yearly income.
An example of a fixed-income security would be a 5% fixed-rate government bond where a $1,000 investment would result in an annual $50 payment until maturity when the investor would receive the $1,000 back. Generally, these types of assets offer a lower return on investment because they guarantee income.
Leverage is using borrowed money to increase your investment buying power. Where an investor with $10,000 that does not use leverage can buy $10,000 worth of bonds, an investor who uses leverage can buy $20,000 worth of bonds or more, with that same $10,000.
People use leverage to try an increase the profit potential of their investments. Leverage is however a double-edged sword: Just as additional buying power that comes with leverage increases your profit potential, it increases your loss potential by the same amount.
So in summary Bond Portfolio Management is not difficult to do, but as with all investments, professional advice should be taken when structuring. If you have more questions, please feel free to comment using the forms below this article. I will be happy to help you with your Bond portfolio management queries.
Amit is an Independent Financial Advisor, based in Dubai since 1997. He is part of the prestigious ‘Million Dollar Round Table’ (MDRT), which is an elite club of the best financial advisors worldwide. He has authored the ‘6-Step Financial Success Guide’, and the book ‘Creating, Preserving, Distributing Wealth’. He helps business owners and professionals ‘Create A Second Income’ through investments.
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