Author Topic: Questions about bonds  (Read 1840 times)

Linea_Norway

  • Walrus Stache
  • *******
  • Posts: 5630
  • Location: Norway
Questions about bonds
« on: June 25, 2017, 12:46:27 PM »
Hello.

No being an American, I am not sure what is meant by bonds.

Where I come from, we usually consider investing in stock(funds) and rent(funds). I suppose the rent funds are state obligations. Investing in rent funds is supposed to be safer than investing in stock, but gives a lower revenue. Traditional pension funds invest 100% in stock fund for young people and investing much more in rent funds for customer that get older.

Where do bonds come into the picture? Is that comparable to investing in rent funds?

Linea_Norway

  • Walrus Stache
  • *******
  • Posts: 5630
  • Location: Norway
Re: Questions about bonds
« Reply #1 on: June 25, 2017, 01:44:10 PM »
Thanks for the explanation, L.A.S.

Mighty-Dollar

  • Bristles
  • ***
  • Posts: 377
Re: Questions about bonds
« Reply #2 on: June 25, 2017, 01:52:43 PM »
You own bonds to smooth out stock volatility. Bonds are a basic portfolio building block under modern portfolio theory. You do not have to own real estate.
I think you mean real estate funds. Real estate is riskier than small cap stocks, large cap stocks, commodities, and international stocks. Standard deviation of 19.62.
https://www.mfs.com/wps/FileServerServlet?articleId=templatedata/internet/file/data/sales_tools/mfsvp_20yrsb_fly&servletCommand=default

PapaBear

  • 5 O'Clock Shadow
  • *
  • Posts: 82
Re: Questions about bonds
« Reply #3 on: June 25, 2017, 04:50:01 PM »
Where I come from, we usually consider investing in stock(funds) and rent(funds).

I am now speculating, since I don't speak Norwegian - but German is somewhat close and has similar financial terms:
What you call "rent funds" are actually bond funds. Here in Germany, they are called "Rentenfonds" or "Anleihefonds". I guess in Norwegian, the equivalent would be "Rentefond". All of these are just different terms for a bond fund.

The easiest differentiation between stocks and bonds is the role in a company's balance sheet and the distribution of returns.
- Every stock holder is a (partial) owner of the company. Stocks pay out dividends and you can benefit from the
- Every bondholder is giving a (partial) loan to the company. Bonds have usually a fixed duration, pay a fixed interest rate and are paid back @ 100% nominal value at the end of the fixed duration (in case the debtor is not bankrupt)

Role of bonds in the portfolio:
In most US-based portfolios, bond funds of debtors with high creditworthiness (investment grade bonds) are used as the more stable/secure part of the asset allocation. In most European countries it makes currently more sense to allocate the stable/secure part of the asset allocation to a ladder of current and fixed deposits with a trustworthy direct/online bank - as these often have a higher yield and are protected by the local deposit protection scheme and thus eliminating the risk of the bankruptcy of the debtor (If I interpret this correctly, there is also one in Norway  up to NOK 2mn per customer, https://www.bankenessikringsfond.no/deposit-guarantee/category949.html).


Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6752
Re: Questions about bonds
« Reply #4 on: June 25, 2017, 05:56:20 PM »
Makes sense. They are renting your money in return for interest payments.

Zariana

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Questions about bonds
« Reply #5 on: June 25, 2017, 07:54:46 PM »
"Bonds" also include some of the worst monetary instruments featured in such hits as "The Great Recession" (see "The Big Short").  Repackaged bad debt, derivatives backed by mortgages, etc.

So if you are thinking of getting some to reduce risk, look at the basic fund strategy and see how it performed in the last recession.  The dodgier ones tracked the crash pretty closely.  Government and AAA corporate bonds weren't impacted.

Linea_Norway

  • Walrus Stache
  • *******
  • Posts: 5630
  • Location: Norway
Re: Questions about bonds
« Reply #6 on: June 27, 2017, 04:53:44 AM »
Where I come from, we usually consider investing in stock(funds) and rent(funds).

I am now speculating, since I don't speak Norwegian - but German is somewhat close and has similar financial terms:
What you call "rent funds" are actually bond funds. Here in Germany, they are called "Rentenfonds" or "Anleihefonds". I guess in Norwegian, the equivalent would be "Rentefond". All of these are just different terms for a bond fund.


Thank you, this confirms what I thought. That a Norwegian Rentefond equals what the Americans call bonds. Our languages are very similar.


The easiest differentiation between stocks and bonds is the role in a company's balance sheet and the distribution of returns.
- Every stock holder is a (partial) owner of the company. Stocks pay out dividends and you can benefit from the
- Every bondholder is giving a (partial) loan to the company. Bonds have usually a fixed duration, pay a fixed interest rate and are paid back @ 100% nominal value at the end of the fixed duration (in case the debtor is not bankrupt)

Role of bonds in the portfolio:
In most US-based portfolios, bond funds of debtors with high creditworthiness (investment grade bonds) are used as the more stable/secure part of the asset allocation. In most European countries it makes currently more sense to allocate the stable/secure part of the asset allocation to a ladder of current and fixed deposits with a trustworthy direct/online bank - as these often have a higher yield and are protected by the local deposit protection scheme and thus eliminating the risk of the bankruptcy of the debtor (If I interpret this correctly, there is also one in Norway  up to NOK 2mn per customer, https://www.bankenessikringsfond.no/deposit-guarantee/category949.html).

I know about the 2 mil NOK per bank in Norway. When I see a new bank offering higher rent than others, I always check carefully if they are included in the government guarantee fund. Norway sometimes considers to lower the guarantee to equal the European level, which is much lower. I hope they leave it where it is.

Linea_Norway

  • Walrus Stache
  • *******
  • Posts: 5630
  • Location: Norway
Re: Questions about bonds
« Reply #7 on: June 27, 2017, 04:55:33 AM »
"Bonds" also include some of the worst monetary instruments featured in such hits as "The Great Recession" (see "The Big Short").  Repackaged bad debt, derivatives backed by mortgages, etc.

So if you are thinking of getting some to reduce risk, look at the basic fund strategy and see how it performed in the last recession.  The dodgier ones tracked the crash pretty closely.  Government and AAA corporate bonds weren't impacted.

I would consider government bonds from countries that I consider safe payers. We'll see when the time comes. For the moment I would like to keep it in stock, but I'll take a look at the bond funds.