Investing in Bonds in 2024: Understanding Essential Financial Instruments

Why Bonds Are Attractive in Uncertain Markets

When the stock market experiences severe volatility, gold prices continue to rise, and bank returns shrink, investors turn to new options that can provide reasonable profits without facing excessive risk. (Debt Instruments) thus emerge as a key player in such situations.

What Are the Characteristics of Debt Instruments?

Fundamentally, debt instruments are contractual documents representing a loan. The purchaser of this instrument, (investor), becomes a creditor with the right to claim interest and principal repayment from the issuer, (a company or government).

The difference from regular deposits is that debt instruments offer higher returns but come with greater risks, as repayment depends on the financial health of the issuer.

Five Risk Aspects to Consider

Default Risk

If the issuing company or entity faces financial problems, it may be unable to pay interest or return the principal on time. This risk is lower for government bonds but higher for corporate bonds.

Interest Rate Risk

When the central bank adjusts interest rates, investors holding fixed-rate debt instruments may miss out on higher yields.

Liquidity Risk

The debt market is less liquid than the stock market. Selling before maturity may be difficult due to the challenge of finding buyers.

Inflation Risk

Rising inflation reduces the purchasing power of money. Even if returns are earned, real value may decline.

Reinvestment Risk

When the bond matures, if market conditions are unfavorable, there may be no good investment opportunities for the returned funds.

Hidden Rights Investors Should Know

Callability(

The issuer may have the right to repay the entire principal before maturity, which could deprive holders of future interest income.

) Putability### Investors have the right to sell the bond back to the issuer, protecting themselves when market conditions change.

( Convertibility) Holders can convert the bond into common stock of the company, offering the chance to benefit from both stock price appreciation and dividends.

Types of Debt Instruments Available

By Issuer

Government Bonds carry the lowest risk as they are backed by the state, but offer the lowest returns. Government Agency Bonds have moderate risk, while Private Corporate Bonds carry the highest risk but also the best returns.

( By Priority of Claim Subordinated Bonds are paid after other creditors, whereas Unsubordinated Bonds are paid alongside ordinary creditors.

) By Collateral Secured Bonds ###Secured### are protected by the issuer’s assets, while Unsecured Bonds ###Unsecured( depend solely on the issuer’s ability to pay.

) By Interest Payment Method Regular Coupon Bonds provide periodic returns, often paid twice a year. Zero-Coupon Bonds do not pay interest during holding but are redeemed at a premium at maturity. Non-Interest Bonds generate returns from price differences.

( By Interest Rate Type Fixed Rate )Fixed Rate### bonds offer consistent returns throughout the term, while Floating Rate ###Floating Rate( bonds adjust according to reference interest rates.

Calculating Bond Returns

Suppose you buy a bond worth 10,000 THB with an 8% annual interest rate, paid twice a year, for 4 years.

Interest payment each time: 10,000 × )8% ÷ 2( = 400 THB
Annual interest: 400 × 2 = 800 THB
Total interest over 4 years: 800 × 4 = 3,200 THB
Total received: 10,000 + 3,200 = 13,200 THB

Bonds vs. Stocks: Which to Choose?

) Return Perspective Stocks have the potential for higher profits, while bonds offer steady and reasonable returns.

( Risk Perspective Stocks are approximately three times more volatile than bonds. Investors with a high risk appetite can accept this, but short-term investors face higher risks.

) Analysis Perspective Stock analysis focuses on profitability and growth potential, whereas bond analysis emphasizes debt repayment ability and interest rate trends.

Suitable Choice

• For young investors with time to tolerate risk, stocks are recommended for higher returns.
• For nearing retirement seeking stability, bonds are a suitable option.
• For most investors, a balanced mix of both ###Stock + Bond Portfolio### is the best approach.

Bond Trading Mechanism

Primary Market(

Investors purchase bonds directly from issuers through financial institutions or banks. Initial offerings specify the amount, yield, and maturity clearly.

) Secondary Market### Holders can buy and sell bonds among themselves via the BEX (Bond Electronics Exchange) in Thailand, increasing liquidity and trading convenience. Settlement occurs within T+2 ###two business days(, and bonds are stored at the Thailand Securities Depository.

Advantages of Bonds Not to Overlook

) Wide Range of Maturities From 1 day to 20 years, allowing investors to tailor their investment plans.

( Steady Cash Flow Regular interest payments provide additional income streams.

) Higher Returns than Banks As a high-level fundraising tool, bonds typically offer better rates than deposits.

( Lower Risk than Stocks Bondholders are paid before shareholders, significantly reducing default risk.

) Sufficient Liquidity The secondary market is well-established, enabling quick sales if needed before maturity.

Conclusion: Bonds in 2024

Bonds are investment tools that balance returns and risks. In an era of financial market uncertainty, understanding and utilizing bonds effectively is a vital skill for modern investors.

Whether you are a beginner or an experienced investor, bonds should be considered part of a long-term investment plan, choosing types that match your risk level and financial goals.