Money is one of the essential items one owns. We use the money to acquire goods and services that satisfy our needs and wants.
Considering the fact that we always have growing needs and wants, there is also the need to earn money all the time. We earn money by working for it or for those who have some money, they make the money work for them.
This is done by investing the money in various ventures including buying what is termed as “bonds.”
Bonds are investment opportunities whereby you lend money to an entity, which is often a government or a company, for a period of time with interest applied due to the terms of the agreement. It is a form of (IOU) or loans a body like a government will secure to finance either a long or short-term project.
In your case, you will lend the money to the government on the promise that the government will pay you back after a specific period. The interest on the bond, however, can be paid in intervals such as 6 months, or a year.
Buying bonds is regarded as a relatively safe way to grow your money, especially when you do not have a pressing need for it. If you are considering buying bonds, these are 5 key things you must know.
The Bond Market
The bond market in Ghana is facilitated by the Ghana Fixed Income Market. When you decide to buy a bond, or in other words, lend your money to a government or a company, you have to go to what is called the bond market. This is a marketplace where players buy and sell bonds. The bond market in Ghana is established by key stakeholders in the financial market led by the Bank of Ghana (BoG), Ghana Stock Exchange, (GSE), Central Securities Depository Ghana Ltd (CSD), Ghana Association of Bankers, the Ministry of Finance, Financial Market Association (ACI Ghana) and Licensed Dealing Members (LDMs) of the Ghana Stock Exchange.
How To Buy And Sell Bonds
Though the GFIM is the main facilitator for buying and selling bonds, you do not have to go to the GFIM to trade in bonds. You have to do that by engaging either banks or licensed dealing members also known as Brokers and Broker-Dealers. These are companies that buy and sell securities on behalf of investors for a fee or a commission.
What Happens When You Contact a Bank or a Broker
When you buy a bond, you are lending money to the government or a company and this requires that a special account is set up for this. When you contact a bank or a licensed dealer, a depository account is created purposely for this transaction. The requirement is just like opening an account with your bank. The account you open will be credited with the bonds you buy as well as debited with the bonds you sell. Subsequently, periodic statements from the Central Securities Depository (Gh) Limited that will be sent to you will show the number and amount of bonds you hold.
What Affects Bond Prices?
When you buy bonds, you are lending money at a certain interest rate which then affects what the final bond price will be. This price changes from time to time. In setting the bond price, there are a number of factors that come to play including the economic and market conditions of the country issuing the bond. Another factor is the set time the bond is said to mature. A bond with a longer maturity time is more likely to be affected by changes in interest rates largely due to changes in economic conditions and the credit quality of the government or company issuing the bond.
What is a Bond Risk?
Buying bonds is not a risk-free investment. As an investor or a prospective bondholder, you need to be aware of the risk you are taking on. Just as with any investment opportunity, it is advisable not to put all your savings into bonds. That is because an issuer, a government or a company, may likely fail to pay both the money you lent it and/or the interest it attracted. Most of the time, high-risk bonds, that is bonds from the government or companies with poor credit ratings, tend to come with a high-interest rate.