Equities are Best for People who Can Invest Over Time

"Overwhelmingly, for people that can invest over time, equities are the best place to put their money. Bonds might be the worst place to put their money. They are paying very, very little, and they are denominated in a currency that will decline in value."

Warren Buffett

Is there a Legal Cap on Bond Rates?

Picture portrays bond and wonders about rate cap 

Actual Question:

What is the maximum interest rate and minimum interest rate for issue of debentures?

Answer:

Dear Friend!

There are no laws or regulations that fix the minimum and maximum interest rates for debentures or bonds; it is the market that determines them.

The debenture is a debt contract and the interest rate is one of the contract terms. In a contract it is the mutual consent and acceptance that matters.

In reality the interest rates of debentures are governed based on following factors:

• Is it a government debt?
• If private debt is there a sovereign guarantee?
• Is it a secured or unsecured?
• What is the tenure or repayment period - short or medium or long?
• Credit Rating assigned by independent rating agency
• What are the prevailing market interest rates for similar instruments?
• What is brand value of the issuer - example TATA Steel
• There are many other factors that go into finalising the interest rate of the debenture. Finally whether the rate will be attractive to the investors and affordable to the investor are the key.

Thank you,

With Best Regards

Anand

Related:

• What Is Basis Points?
• What is Negative Interest Rate?
• What are Repo and Reverse Repo Rates?
• How Repo Rate Affects Debt Funds?

What is a Convertible Bond - Video

What is the Better Investment Instrument Between Stock and Bond?

There is not a shred of doubt that only shares can give excellent results and create real wealth over a long period of time.

Bonds and Debentures just fixed income securities that offer no scope of capital appreciation, at least in India as of now. In advanced financial markets bond markets are highly mature allowing scope for a bit of capital appreciation and enhancing interest yield. Therefore they are merely like fixed deposits in banks with higher risks.

Investing in stocks directly however requires investing knowledge and there are two options before the investor:

Option 1: Making Investments Directly in Shares

Devote a couple of hours every day and learn and practice value investing. The best and only book I will recommend is “The Intelligent Investor” by Benjamin Graham.

You may also visit this blog “Wealth Vidya” and a few other value investing sites.

Caution:

Please beware of a number of books and websites that encourage people to engage in day-trading, margin-trading and trading in futures and options, commodities and currencies. All these are not investing activities but purely speculative acts that have the potential to destroy the capital and even lives of people.

Option 2: Investments in Index Mutual Funds:

Those who cannot afford to learn investing have this easy and wonderful option of investing in Index Funds and Exchange Traded Funds (ETFs).

Long term Investing:

Whether you choose option one or two, please always remember that the secret behind investment success is the law of “Miracle of Compounding”, which requires you to keep investing and be invested for 20 to 50 years.

Conclusion:

There is not an iota of doubt that only shares or stocks are the investment vehicles that can yield investment success and real wealth creation.

How To Invest In Stocks And Bonds For Beginners - Video

Bond Definition

Bond

Bond is a type of loan that is broken down into small pieces and issued to the general public. Usually, these are listed on popular stock exchanges and are freely tradable in the open market.

As in any loan, the bond specifies:

1. Face value of the bond
2. The rate of interest or coupon rate
3. Frequency of payment of interest – quarterly or half yearly or annually
4. Date of redemption or repayment or maturity

Bonds can be unsecured or secured by specific assets or a non-specific, generally secured by overall assets of the company.

Sometimes bonds are issued with an option to the investor to convert the bond into an equity share of the company at a certain pre-specified price. Such bonds are called convertible bonds.

Sometimes bonds are also called debentures. There are subtle differences between the two based on security, purpose and duration but they are different in different countries and many times used interchangeably.

In real investing stocks/ equity is the main investing instrument; bonds play an important but only a balancing role. They act as a counterweight. When stock prices/ stock markets are high you should invest in bonds. In the same vein, when the stock markets are depressed you should switch over to stocks and dump investing in bonds.

Related Posts:

What is the Difference Between a Bond and a Share?

Can Investment in Corporate Bonds be made in India through Online Trading Account?

Warren Buffett - “Equities are Best for People who Can Invest Over Time.”

Is there a Legal Cap on Bond Rates?

Bonds -Yield Definition

Distinction Between Rate of Interest and Interest Yield