Since the vast scale of the U.S. bond market, its well-established financial market mechanisms, and excellent liquidity, U.S. Treasury bonds are considered a safe investment tool. As for corporate bonds, the market value of companies listed in the U.S. accounts for nearly half of the global market.
How should one start investing in bonds? Is it good to buy bonds?
There are four types of bond interest rates: Coupon Rate, Current Yield, Yield to Maturity (YTM), and Yield to Call (YTC).
There are two main ways to profit from investing in bonds: fixed income (interest income + repayment of principal at maturity) and capital gains (price difference).
Bonds, depending on their maturity period and risk level, offer varying returns. For instance, a typical medium-term investment-grade bond might yield an annualized return of about 3% to 6% (the yield is influenced by the current benchmark interest rate and the bond's risk level). In the long term, the overall return is usually slightly lower than stocks, but it is more stable, and the price risk fluctuation is relatively smaller. Generally, the price volatility in the stock market is about 2 to 3 times greater than in the bond market. However, some high-risk bonds, such as junk bonds, may have volatility levels closer to the stock market.
Whether investing in a single bond or a portfolio of bonds, aside from default risk, the following factors also influence bond returns:
Any investment takes risks, and higher risks typically correlate with higher returns. However, when investing in bonds, one should avoid taking unnecessary risks as much as possible.
1. Different entities have different purposes for investing in bonds: Financial Institutions vs Individuals.Financial institutions and individuals, these two different types of entities, have different purposes for investing in bonds.
For beginners, it is advisable to familiarize themselves with three types of bonds: U.S. Treasuries, investment-grade bonds, and emerging market bonds.Previously, we mentioned that individual bonds have high purchasing costs, making them less suitable for beginner investors. Next, we will delve into bond ETFs to explain this point.
Q1: Should buy bonds when the stock market is in a bull market (when prices are very high)?One opinion is that bonds are not worth considering because their long-term returns are lower than stocks. Is this opinion correct?