What you should know about bonds in Europe
The next time you go for a walk or drive through your city, pay attention to the changes that are happening. See if you are building or repairing any road or bridge; maybe they are building a new school; or a new office building is being built in a vacant lot; or a factory is expanding its operations with new machinery or new facilities.
All these projects and others like them are examples of bonds work on behalf of governments and businesses. Before hiring, to move the earth, pour the concrete, building walls, the money you pay the works must be available. Chances are bond issues arising to start a project.
Infrastructure is a term that includes roads, bridges, transportation systems, power plants that light and heat our homes, reservoirs and pipes that bring us water or sewer system that maintains sanitary conditions, among many other examples . Without bonds to finance the renovation of infrastructure and its replacement in the right way, these systems would crumble and the world could become a dangerous and unhealthy place.
We all pay taxes for governments to continue to work and providing the necessary services. But the amount of taxes the government collects over a period of time can vary greatly depending on the economy. However, military, police, health workers, teachers and yes, tax collectors, always charged in a timely manner. In addition to financing infrastructure projects long-term bond issuance it helps governments manage times of low cash flow.
The bonds are one way our public and private institutions have to borrow money, billions of euros and pounds. Another way is the direct lending through loans from commercial banks and other financial institutions. If however, bonds offer greater flexibility to investors because they can be sold to other investors in the secondary market if an investor wishes to recoup its capital before maturity. Commercial banks lend money in the form of customer deposits and normally need their customers to lock their deposits for a period of time (eg 90 days), after not offer the same degree of flexibility to the depositor.
Bond investors, therefore (people and institutions acquire bonds) by are the lenders. The bond issuer promises to repay the bond investor the amount borrowed, also known as capital or bonds at par or nominal values at a given time, known as the redemption or maturity date. As the euro today is worth more than the promise of a euro tomorrow, bond issuers have to pay the investor interest in annual or semi-annual payments at a defined rate known as the nominal interest rate. For the issuer, the interest expense is the cost of borrowing; for the investor, the income of reliable compensation interests are borrowing money.
Older customers purchasing bonds are investment companies and financial institutions such as insurance companies and banks, which buy bonds to have stable sources of cash flow to pay the obligations of the insurance policies they sell. Both companies and governments also have significant pension obligations with its retired employees. These pension funds also buy bonds to ensure that the money is there when needed to keep the confirmations of beneficiaries and ensure their retirements. These large investors depend on bonds for cash flow they need to meet predictable obligations. Individuals can also purchase bonds whenever a government or a corporation them out for sale. They can do this directly, provided they have enough to meet the minimum investment requirements, or indirectly through bond funds that pool investors’ money for investment in bond portfolios.
As investments, bonds give individuals a way to preserve capital and provide predictable performance gain. Investment in fixed bonds can create revenue streams from payment prior to the expiration date investment. Bonds can also be a negative investment to volatile movements in stock markets. A diversified investment account should include some fixed income securities, either directly or through a channel of investment in bonds, as bond funds.
However, not all bonds are equal. The quality of your credit depends on the relative ability of the issuer to pay interest and repay principal as required. The better the reputation, the lower the risk, and therefore will be less for the interest paid on the bond, but it is likely that investors receive all that they are owed. For this reason, the bonds offered by some EU governments and the governments of the UK and US They are generally considered the safest in the world for investors. The strong economies, publication of budgets and a long tradition of insurance payments, and the power to raise taxes and print money are the factors that contribute to the high creditworthiness.
For corporations the story is similar, except for the companies always pay a higher interest rate than the highest interest of governments because companies do not offer the same guarantee. Companies with financial strength, a history of success, good business practices and a record of paid debts, issue bonds at a lower interest rate than companies with lower credit worthiness.
Bonds are not only a way to invest and get a return on your money; They are also a way to invest in the security of nations, the growth of economies and business expansion. Regardless of who issues or invests in them, bonds play a crucial role in the life of the economy in Europe and worldwide.
Originally published at Buzz Stock Markets.