“How can the average person invest today and make good returns? I’m not looking for a fly-by-night investment scheme; I want a legitimate opportunity that I can place my hard-earned money and receive a worthwhile profit.”

Over the three years of writing this column I have seen an increase in the numbers of people enquiring about investment options. They have a genuine desire to find out how their money can work for them. Gone are the days when the investment arena was occupied only by jargon-speaking financial traders and the super-rich!

While persons may have heard about the benefits of investing in the money market and the stock market, many people have never examined the possibility of earning big in the market for bond investments.

A bond is a medium-to long-term debt instrument, and it is used by governments and large corporations to finance their long-term capital needs. It’s basically an official IOU that has terms outlining when the investor will be repaid the principal invested, how much, and how often interest payments will be made.

Types of Government of Jamaica bonds

In Jamaica, there are a variety of bonds for the average person to invest in. The Ministry of Finance periodically issues new bonds to the general public in the primary market, which can be accessed through brokerages and securities dealers. Debentures are the most common types of Jamaican dollar bonds bought by individual investors, as they can bring a fixed interest rate with usually quarterly interest payments.

Some bonds can offer foreign currency benefits. US$ Indexed bonds are denominated in United States currency, but investors pay for the bond with Jamaican dollars at a specified exchange rate. The interest and principal payments are made in the equivalent Jamaican dollars, based on the exchange rate at the time of payment. This type of bond can provide investors with a hedge against depreciation, without them actually having to buy the foreign currency.

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Eurobonds or global bonds are issued by the government outside of the country in a foreign currency such as US or Euro dollars. These bonds are usually underwritten by large brokers and then re-sold immediately to international clients. Many local institutions, investment funds and individuals buy and sell these Jamaican global bonds.

Earning more with bonds

The length of a bond can be anywhere from two years to thirty years or more, so these debt instruments carry more risk than money market debt investments which only last for a maximum of one year. Who knows what the economic climate will be in ten years’ time. This is one of the reasons why bonds typically offer investors higher interest rates.

However, the interest rate attached to the bond is only one of the ways that investors can maximise their investment returns. After the bond is originally issued, regular trading activity in the secondary market can present profit-making opportunities. Bonds have prices that can fluctuate according to supply and demand, economic conditions and interest rate changes.

So an investor could buy a bond when it is originally issued, collect the regular interest payments, hold it until it matures, then get back the principal invested. Or the investor could buy the bond with the specific intention of selling it back at a higher price to make a gain on the original amount invested.

The prevailing economic conditions aren’t all bad, there are some positive spin-offs for savvy investors looking for deals. Jamaican government global bonds offer attractive interest rates on $US or euros of up to 11.75 per cent per annum. The prices of these bonds have been falling due to decreased demand and negative speculation; they can now be bought at low rates, some with almost a 40 per cent discount. Consequently, they offer investors the possibility of buying low now and selling at higher prices when the market rebounds.

Risks of bond investments

Like any other investments, bonds carry risks that should be evaluated by potential investors. There is a default risk that the issuer of the bond, the entity that is borrowing the money, may not be able to pay back the interest or principal. There is also a liquidity risk that the investor may not be able to sell the bond quickly to get back cash.

Bonds are also sensitive to changes in interest rates and other economic developments. These can lead to fluctuations in the prices of the bonds which can negatively affect their value. Therefore, if the investor is forced to sell the bond, he or she may have to take a loss in principal.

Despite the risks inherent in bonds, they still can be a viable investment option for individuals. You can buy bonds with as little as US$1000 at some securities brokers, so check around. Speak to a licensed investment advisor to get more information on investing in bonds.