By BABAJIDE KOMOLAFE

In the last edition, we explained that shares represent ownership, while bonds represent debt. When you buy shares, you buy ownership of the company that sold or issued the shares. But when you buy bonds, you are lending to the organisation (government or company) that sold the bonds. You now know the basic difference between shares and bonds.

But before you decide to buy bonds, you need to be aware of the benefits, or the advantage they have over shares, and the risks, or limitations.

Bonds basically offer two things. First is fixed stream of income, and secondly safety of investment. As mentioned in the last edition, the bond issuer always indicate, the interest rate he/she wants to pay on the loan being generated with the bonds. The interest rate is called the ‘coupon rate’, and it is contained in the bond offer document.

Most times, the coupon rate is fixed, but sometimes, it may be tied to other rates like treasury bill rate, the Monetary Policy Rate, the Inter-bank interest rate, or inflation rate. When the coupon rate is not fixed, it is called floating coupon rate. So, the bond issuer, may offer N100 billion for three years at 10 percent. The implication is that the issuer will pay interest rate of 10 percent every year throughout the tenor of the bond.

The issuer can choose to pay the interest rate at the end of the year or quarterly or bi-annually. In the case of shares, where companies may not pay dividend, reduce or increase the dividend they pay each year, the interest earned on your investment in bond does not vary. Whether the issuer makes money or not, it does not affect it.

In fact, if the company that issued the debt closes shop, and it has to be liquidated, the proceeds of the liquidation will be used to pay bondholders, before shareholders get anything. Though bonds are also traded on the stock exchange, the interest payment is not affected by what happens to its price on the exchange; market crash or collapse does not affect it.

So, with bonds, you are certain of the income or return you would make on your investment. This is not so in the case of shares.  The second basic advantage of bonds over shares is the safety of what you invested. Because it is a loan, at the end of the maturity of the loan, the issuer will repay the exact amount borrowed.

So, if you bought N10, 000 worth of bonds, at the end of the maturity, you will receive N10, 000. In the case of shares, the N10, 000 you invested might have increased to N20, 000 due to appreciation of the share price. It may also reduce to N2000 due to depreciation of market price. And you may even lose everything, if the company folds up. So, bonds offer certainty or safety of your investment.

Another major difference between bonds and shares is that bonds have definite maturity i.e. three years, 20 years. But shares do not. Once you buy the shares of a company, it is for life. You can’t go back to the company to give you back your money. The only way you can recoup your money is to sell the shares on the stock exchange.