Compared to stocks, bonds are safe havens for investors. Stock price tends to fluctuate wildly, whereas bond price not so much. Especially for those investors who need periodic, and fixed income, bonds are their favorite investment vehicle. Some advantages of bonds are:
- The volatility of bonds (especially short and medium-dated bonds) is lower than that of equities (stocks).
- Bonds are often liquid.
- If a company goes bankrupt, its bondholders will often receive some money back (the recovery amount – exception in some countries).
Having said that the downside of bonds are they yield less than stocks on average and in general. Currently, the 10 Year Treasury Rate is at 2.15%. And, Moody’s Seasoned Aaa Corporate Bond Yield is at 3.49%. In average, the S&P 500 yields 10% per annum. Stock’s yield beats bonds and Treasure rate hands down.
What if there are bonds which yield more than 10% per year? Well, there are! Not in the US, though. In developing markets, a 10% coupon for bonds is fairly common. Investors jump on the beat only if the bond’s coupon rates go over 13%. If the rate is below 13%, the companies issuing the bonds should invest a lot of time in finding the investors. Here is one of the advertisements for a bond which yields 10.25% per annum.
Here is its highlight-
Term – 10 Years
Face Value – RPR 1,000
Interest Rate – 10.25% per annum (paid semi-annually)
* Not backed by assets.
Domestic customers in the United States will surely bang their head seeing this. Stressfree earning 10.25% per year on any investment is a great deal when you have to work so hard to get 10% return investing in stocks.
Having said that, you have to consider myriad things to compare these underdeveloped and developing nation’s financial offerings. They come with high geographical risk, political risk, currency devaluation risk and inflation risk.