Bonds in 2024: A New Option for Investors Seeking High Balance

The current investment market shows signs of change as investors seek channels that can provide steady income streams along with principal protection. Bonds have become an option that will likely regain attention after a long absence. Whether government bonds, corporate bonds, or securities issued by public organizations, they all play a vital role in building a stable portfolio.

Basic Concepts and How They Work

Debt instruments are financial tools that represent a promise between the issuer (borrower) and the holder of the security (creditor). The issuer commits to paying interest at specified intervals and repaying the principal at maturity. The key point is that bondholders have a higher claim on assets than common shareholders, which is why returns are lower than stocks but risks are also reduced.

Investing in debt instruments differs from speculation because investors typically hold until maturity and receive systematic returns. However, market conditions and external factors can impact the true value of these securities.

Risks Investors Should Be Aware Of

Although bonds are perceived as a safe investment, the reality is not so simple. Investors need to understand the main sources of risk, which include five key types:

Credit Risk: Companies with weak financial positions may lack sufficient funds to repay at maturity, leading to partial or total loss of principal.

Interest Rate Risk: If market interest rates rise after investment, investors miss out on higher returns, and the value of bonds in the secondary market declines accordingly.

Liquidity Risk: Bonds do not have as active a trading market as stocks. Selling before maturity may pose difficulties in finding buyers or require selling at a discount.

Fundamental Risk: Rising prices of goods and services reduce purchasing power, and returns may be insufficient to offset losses.

Reinvestment Risk: When bonds mature, investors may lack suitable options to reinvest their funds, especially if market conditions are unfavorable.

Additionally, investors should pay attention to embedded rights associated with bonds, such as issuer call options (which can lead to loss of remaining income) or conversion rights, which increase in complexity with certain securities.

Types of Bonds Currently Available

The bond market today offers a variety of options to meet different investor needs:

Issuer-Based Classification: Government bonds carry the lowest risk as they are backed by public institutions. Bonds issued by state enterprises also have relatively low risk, while corporate bonds offer higher yields but come with increased risk.

Seniority Hierarchy: Subordinated bonds provide the highest returns but carry the greatest repayment risk, whereas non-subordinated bonds offer higher protection.

Collateral-Based Classification: Secured bonds, backed by assets, offer greater security. Unsecured bonds rely solely on the issuer’s creditworthiness.

Payment Structure Classification: Fixed-rate bonds provide steady cash flows; floating-rate bonds adjust interest payments based on market conditions; discount bonds are purchased below face value and yield returns through price differences.

Interest Rate Type Classification: Fixed-rate bonds offer stability; floating-rate bonds adjust according to market conditions, each with its own advantages and limitations depending on investor perspective.

Investment Methods and Return Calculations

Investing in bonds has become increasingly accessible today. Investors can access through two main channels:

Primary Market: Buying bonds directly from the issuer, typically for institutional investors or large-scale investments. Terms and yields are often negotiated.

Secondary Market: Trading bonds that have already been issued among investors. Settlement occurs T+2, and bonds are held through the Securities Depository Center of Thailand. This market is known as BEX, offering reasonable liquidity.

For basic return calculations, consider an example: a bond with a face value of 10,000 THB, an 8% annual coupon paid semiannually over 4 years. The investor receives 400 THB twice a year, totaling 3,200 THB over 4 years, plus the principal of 10,000 THB, totaling 13,200 THB. The yield of this bond is 3,200 THB.

However, this calculation does not account for changes in market interest rates or fundamental risks. If the investor sells in the secondary market, the actual rate may differ from this basic estimate.

Reasons to Include Bonds in a Portfolio

Bonds offer several advantages that make them worth considering:

First, diversity in duration: from 1 day to 20 years, allowing investors to choose durations aligned with their financial goals.

Second, stable cash flows: investors selecting bonds with regular interest payments receive consistent income.

Third, higher returns than regular bank deposits: bonds generally offer higher yields to compensate for increased risk.

Fourth, seniority in claims: bondholders have priority over shareholders, providing greater security.

Fifth, improved liquidity: the secondary market allows investors to exit positions before maturity.

Comparing Bonds and Stocks

Deciding between bonds and stocks depends on several factors:

Returns: Stocks have the potential for higher long-term gains, while bonds tend to provide predictable and stable returns.

Risks: Stock prices can be highly volatile, potentially tripling in fluctuation, and are sensitive to market sentiment. Bonds depend primarily on the issuer’s ability to meet debt obligations.

Analysis: Stock analysis involves evaluating growth potential and profit margins, whereas bond analysis focuses on interest rate environments and issuer’s financial health.

Portfolio Recommendations: Young investors with higher risk tolerance may prefer stocks as a primary choice. Older investors or those seeking less volatility may favor bonds. A balanced portfolio combining both often yields the best results; the optimal ratio depends on age and goals.

Summary

Bonds are an indispensable part of a balanced investment strategy. In 2024, amid market uncertainties, bonds offer a reasonable solution for those seeking systematic returns without taking on severe risks. With a deep understanding of risks, various types, and investment methods, each investor can make more confident financial decisions tailored to their circumstances.