THOUGHT OF THE WEEK
A guide to fixed income investing (Part 2)
Fixed income investments have lower risks than stocks though there are risks associated with fixed income investments. A few of these risks are:
Default risk- this is the risk where the borrower may not be able to repay the loan. This is the worst that can happen because you will lose the income stream in the form of interest payments in addition to your principal investment. It rarely happens especially with government securities.
Inflation risk- this is one risk that all investors should pay attention to. Fixed income works on the principle of trading your money today with hope of receiving extra money at a future date. Increase in inflation over the period of your investment will reduce your purchasing power.
Interest rate risk- when interest rate goes up your fixed income investment is affected because you would have booked that investment at a lower interest rate and will remain so until the investment matures. The prices of the fixed income investment will fall when interest rates rise but when interest rates decline, the prices go up and as an investor you could sell you fixed income investment at a premium.
Call risk- when callable bonds are issued, the issuer has the right to redeem the bond before maturity. If interest rates go down, the issuer of a callable bond can repay the bond by issuing bonds at lower interest rates and using the proceeds to pay off the bonds with the higher interest rates. When this happens, the interest payments of the bonds cease and the principal is paid back to the bondholder.
This weekly report is the copyright of NIMED Capital Ltd. (NIMED), an investment banking company licensed and regulated by the Securities and Exchange Commission (S.E.C.) of Ghana as Investment Advisers as well as the National Pensions Regulatory Authority (N.P.R.A.) as an approved Pension Fund Manager. Information and opinions herein have been compiled or arrived at based on information obtained from sources considered reliable; we therefore do not hold ourselves responsible for its completeness or accuracy. All statements of opinion, projections, forecasts, or those relating to expectations regarding future events or performance of investments represent NIMED’s own assessment and interpretation of information currently available to NIMED which are subject to change.