What makes bonds different to equities?
While many investors are familiar with equities, they could be missing out on the benefits of another major asset class – bonds.
Bonds may seem complicated at first, but they can play an important role in a diversified portfolio, so it’s well worth getting to know more about bonds and discovering if they’re right for you.
A simple way to understand bonds is to compare them with equities. Let’s walk through the key features, differences and advantages.
Text on screen: Comparing bonds with equities
Text on screen: Investment
With equities, investors purchase a share own part of the company, whereas with corporate bonds investors lend money to the company which pays it back to them with regular interest payments known as coupons.
Text on screen: Income
Investors in equities may receive dividends, which are paid at the discretion of the company. Whereas with bonds, investors typically receive coupons paid in predictable, scheduled instalments.
Text on screen: Capital preservation
With equities, the amount of capital investors get back depends on the share price when they’re sold. However, with bonds which are held to maturity, generally all of the capital is paid back.
Text on screen: Risk profile
Equities have a mostly higher risk profile compared to bonds, which offer a generally lower risk.
Text on screen: Company performance
With equities, if a company performs well, the shareholder may benefit through increased dividends and a higher share price.
Conversely, if a company does poorly, its shareholders can see reduced or even no dividend payments and may lose capital with a lower share price.
And with bonds, coupon payments may remain fixed regardless of company performance, and investors receive back the agreed principal at maturity.
Text on screen: If a company declares bankruptcy
If a company is declared bankrupt, its shares likely become worthless and investors may lose all of their capital. However, as bondholders are prioritised for payment over shareholders, in most cases they have the opportunity to recover some of their capital.
So, now you understand more about bonds, it’s easy to see how they can play a valuable role in a diversified and balanced investment portfolio.
Text on screen: Take the next step
Would your portfolio benefit from bonds? Talk to your investment professional today about how investing with PIMCO, a global leader in active fixed income, could help meet your financial goals.