Home' Trinidad and Tobago Guardian : April 13th 2014 Contents It s a common misconception to think
of bonds as "plain vanilla" investments
that are appropriate only for certain
types of people, such as financially
conservative retirees. But, in reality,
bond investments may have the poten-
tial to add stability to a portfolio and help
reduce overall investment risk; regardless of
your age or financial outlook.
What is a bond?
Bonds are investment securities issued by
corporations or governments to raise money
for a particular purpose. Basically, bonds are
the "IOUs" of the business world. There are
different types of bond funds, each with varying
levels of risk and return potential. Generally
speaking, the higher the risk, the better the
return potential. For example:
• Government bond funds invest in bonds
issued by the US Treasury. Historically, they
have been among the strongest types of bond
investments. However, they typically offer
lower returns than other bonds.
• Corporate bond funds invest in bonds
issued by private companies. They can range
from "investment grade" (safer, lower return
potential) to "below investment grade" (riskier,
higher return potential).
Know the risks
Bond funds are subject to several types of
investment risk, including:
• Market risk: like stock prices, bond prices
move up and down. However, such fluctuations
tend to be less severe in the bond market.
• Interest rate risk: When interest rates rise,
bond prices may fall, and vice versa.
• Inflation risk: If the return on a bond fund
does not outpace the rising cost of living, the
purchasing power of your investment could
decline over time.
Despite these risks, investors of all ages may
potentially benefit from putting some money
in bond funds. Because bond funds tend to
respond to market influences differently than
stock funds, they may help balance out the
risks associated with stock investing.
In addition, lower-risk bond funds, such as
government and investment-grade corporate
bond funds, may help protect some of your
money from losses during turbulent times.
Bonds are subject to interest rate risk. When
interest rates rise, bond prices fall; generally
the longer a bond s maturity, the more sensitive
it is to this risk.
Bonds may also be subject to call risk, which
is the risk that the issuer will redeem the debt
at its option, fully or partially, before the sched-
uled maturity date. The market value of debt
instruments may fluctuate, and proceeds from
sales prior to maturity may be more or less
than the amount originally invested or the
maturity value due to changes in market con-
ditions or changes in the credit quality of the
Bonds are subject to the credit risk of the
issuer. This is the risk that the issuer might
be unable to make interest and/or principal
payments on a timely basis. Bonds are also
subject to reinvestment risk, which is the risk
that principal and/or interest payments from
a given investment may be reinvested at a
lower interest rate.
Bond funds and bond holdings have the
same interest rate, inflation and credit risks
that are associated with the underlying bonds
owned by the funds. The return of principal
in bond funds, and in funds with significant
bond holdings, is not guaranteed.
Morgan Stanley, its affiliates and Morgan
Stanley Financial Advisors do not provide
tax or legal advice. Individuals should consult
their personal tax or legal advisors before
making any tax or legal related decisions.
Article by Wealth Management Systems,
Inc. and provided courtesy of Morgan Stanley
The author(s) are not employees of Morgan Stanley
Smith Barney LLC ("Morgan Stanley"). The opinions expressed
by the authors are solely their own and do not necessarily
reflect those of Morgan Stanley.
The information and data in the article or publication
has been obtained from sources outside of Morgan Stanley
and Morgan Stanley makes no representations or guarantees
as to the accuracy or completeness of information or data
from sources outside of Morgan Stanley. Neither the infor-
mation provided nor any opinion expressed constitutes a
solicitation by Morgan Stanley with respect to the purchase
or sale of any security, investment, strategy or product that
may be mentioned.
Trinidad Guardian engaged David Fox to feature this
article. David Fox may only transact business in states where
he is registered or excluded or exempted from registration.
Transacting business, follow-up and individualised responses
involving either effecting or attempting to effect transactions
in securities, or the rendering of personalised investment
advice for compensation, will not be made to persons in
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© 2013 Morgan Stanley Smith Barney LLC. Member
SBG18 | COMMENTARY
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt APRIL 13 • 2014
DAVID H FOX
Understanding bond investing:
It's a matter of balance
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