Bonds should be a vital component of a diversified securities portfolio

Jan 25 2013, 08:57 IST
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SummaryMany of us are active investors in the stockmarkets. But how many of us actively trade in bonds? Many investors believe that bonds are predictable and boring.

are not actively traded. A second consequence of the fact that there are an enormous number of bond issues available is that security identification becomes critical for a potential investor. That is in addition to the issuing firm or government, the coupon, the maturity date, and, if required, the currency as well, should be clearly specified.

Interest on bonds is paid out of pre-tax profits, that is, coupon payments represent a tax-deductible expense for issuers. Thus, coupon receipts are invariably taxed at the hands of the investor. The tax-deductible feature of such securities also provides equity shareholders with leverage. That is, equity returns get magnified since payments to bondholders are fixed in nature.

The writer is the author of ‘Fundamentals of Financial Instruments’, published by Wiley, India

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