The recent times, characterized by rising inflation in Israel and the world and rising interest rates, have turned the spotlight on the bond markets in Israel and around the world.
So what are bonds actually?
They are a type of financial instrument with which various types of entities borrow money.
When issuing a bond, the issuing entity receives sums of money from the purchasers and undertakes in return to pay the purchase amount plus interest and/or linkage and return the principal amount under the pre-determined conditions.
Basically, when buying bonds, the buyer gives a loan to the body that issued the bond.
Some of the bonds are traded on stock exchanges in Israel and around the world.
For investors, the bond market provides an alternative to investing in various deposits, and the investor must check what the interest rate and/or linkage that the bond pays compared to what can be obtained from investing in other financial instruments.
In Israel there are two main types of bonds: government bonds and corporate bonds.
Government bonds are issued by the government for its various uses.
The government is the largest issuer of bonds on the Tel Aviv Stock Exchange.
Bonds of companies (corporate bonds) are a means of financing their activities.
Sometimes companies choose this financial means in addition to or instead of issuing shares or bank or other credit.
Corporate bonds are considered to have a higher level of risk than government bonds.
A bond of any company may not return the promised amounts if the company goes bankrupt or runs into financial difficulties.
Are bonds a solid investment compared to stocks?
In many cases there is a tendency to think yes, since bondholders are considered debtors, and if God forbid there is any problem in the company, they will have a right to its assets before the shareholders. However, the shareholders are considered to have the potential for greater future profit.
The recent changes in the financial and capital markets increase the need to examine the composition of households' investment portfolios (including pension investments) and see if the levels of risk and opportunity in the various components meet the preferences and needs in terms of risk and expected return, and to make changes if the existing status is not suitable.
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