For earning maximum output from bond investments, you must be aware about its secrets. The crux is that you must be well-versed with the operation of the bonds market. Without this knowledge, you cannot trade. You must know the prices, coupon of a bond, maturity period and obviously, the rates of interest. Most of the people make an error of just checking the prevailing interest rate. This is not enough to earn maximum profits out of this investment.
What are clean and dirty prices?
Well, this may sound surprising for you but there is something called as clean price and dirty price in the bond market. You must be able to differentiate between it. The dirty price is consisted of accrued interest on a bond. And clean price refers to price of the bonds. It is backed with accrued interest and the payment is made separately. You must understand whether you are purchasing a particular bond for clean price or dirty price. Clean price will appear to be lower and this can mislead you. To overcome this issue, you must discuss with your broker whether you are required to pay clean price or dirty price.
Look at the yield and not coupon of bonds
Most of the investors make a mistake in looking the coupon of bonds before investing. The returns from bond investment depend on the yield factor and not on the coupon. Do not confuse the coupon with the returns from the bonds. You must always remember that before purchasing bonds, your must check the prices of the bonds and its relevant yield factor.
Maturity
Another secret of earning money from bonds is to examine its maturity period. Investors are blinded with the notion that if you invest amount for a longer period of time, then you will earn higher interest. Well, this is not the case with the bond market. Sounds unusual! The maturity periods of bonds range from one year to even thirty years. But the bonds with longer maturity period may yield lesser returns than expected. This is because the flexible interest rates in the market have an impact on the bonds and its yield. Hence, before investing, it is better to choose bonds with less maturity period instead of longer one.
Study of relationship between interest rate and yield
The best secret to earn money in bonds market is to remove the traditional mindset of investment. The reason is bonds work in a rather unique manner than other forms of investment. You must analyze the behaviour of bonds market with a fresh and open mind. Let us simplify it. When interest rates fall, the prices of bonds go up. At this time, you can sell your bonds to earn profits. Similarly, the prices of bonds go down when the interest rates are higher. Now, you will take the right step of buying bonds during this period.
The bonds market function in a different manner and must be understood thoroughly. The bonds are subject to less risk but when the risk factor arises, it can cause damage to small investors. So, you must follow the simple secrets of understanding the concepts such as coupon, maturity period and yield curves to make money.
