How to Properly Invest in Bonds.

When considering different types of investments, one can not only create an additional source of income but also make life easier.

In particular, if you figure out how to invest in bonds. This is not a simple, but effective tool to get more than you invested. It is worth separately understanding how to invest money in government bonds, as they have significant differences.

How to invest money in bonds?

Let’s start with the fact that investing in bonds is one of the most popular and conservative ways to invest funds. After all, bonds guarantee a fixed income. That is, while other assets may rise or fall in price, investments in bonds have a guaranteed income. Moreover, if they are government bonds. However, some risks always remain, and this should also be taken into account.

It is necessary to start from the fact that a bond is a debt instrument, which is an obligation of the issuer (government, corporation, or other institution) to pay the investor a certain amount of money (the nominal value of the bond) on a specified date in the future (the redemption date), as well as interest income (coupons) during the term of the bond.

How to properly invest in bonds?

When considering bonds as an investment instrument, it is worth understanding how the process generally occurs. It will also be useful to understand the main features of investing in bonds:

1. Reliability and risk. Government bonds are considered the most reliable, as they are issued by the state. The risk of default is minimal. Corporate bonds are riskier, as they depend on the financial stability of the issuing company. In the event of a company's bankruptcy, the investor may lose their investments.

2. Profitability. Bonds offer a fixed income in the form of coupon payments. The interest rate can be fixed or floating. The yield to maturity is the total income that an investor receives from a bond if they hold it until the maturity date. It depends on the coupon rate, purchase price, and Time to maturity.

3. Impact of interest rates. The price of bonds on the secondary market depends on current interest rates. When rates rise, the price of bonds falls, and vice versa. Investors need to consider potential changes in interest rates if they plan to sell bonds before maturity.

4. Liquidity. The liquidity of a bond is the ability to sell it quickly on the secondary market. Government bonds are usually more liquid than corporate ones, as buyers are confident in their reliability. Illiquid bonds may experience significant price fluctuations when trying to sell.

5. Maturity. Bonds can have different maturities: short-term (up to 3 years), medium-term (from 3 to 10 years), and long-term (over 10 years). Short-term bonds are less exposed to interest rate risk but offer lower yields. Long-term bonds, on the other hand, may be more profitable but also riskier in terms of interest rate changes.

Benefits of investing in bonds:

1. Stable income. Regular coupon payments ensure predictable earnings.

2. Capital preservation. By holding bonds until maturity, an investor retrieves their funds unless the issuer defaults.

3. Diversification. Bonds help reduce portfolio volatility, especially during periods of market instability.

4. Inflation protection. Some bonds protect against inflation, such as those indexed to an inflation index.

Investing money in government bonds in Ukraine is one of the safest and most stable ways of investing.

How does it happen?

The process of buying bonds is quite straightforward if done step by step. First, it is advisable to choose a method of purchase. There is an option through a bank or a broker. This is the most common way. To do this, it is necessary to open an account in one of the banks or brokerage companies that provide access to the market of government bonds.

Another option is to do this through the stock exchange. Bonds can be purchased through the Ukrainian Exchange (UX) or the PFTS (First Stock Trading System), but for this, a brokerage account will also be needed.

After that, you need to open an account. This can be done through:

1. Bank. Many Ukrainian banks offer services for purchasing government bonds, such as PrivatBank, Oschadbank, Ukrgasbank, and others.

2. Broker. You can also open an account through a licensed broker, who will provide you access to buy and sell bonds in the market.

After that, you can choose the bonds themselves. Subsequently, they can be purchased through the open account. You will need to deposit money into the account, and the broker or bank will purchase the bonds on your behalf.