Sep 25

Bonds , or how to invest in our own country safely

As mentioned in previous posts that the debt crisis we are currently in Europe , is making many of us, we had not ever heard certain economic terms , we may become true experts in economics and finance . We had never heard of the risk premium , and now we have it in the soup , talking about markets seemed we go to buy vegetables at the nearest post , the bonds by entries in the pool …

Indeed, the latter term is that we will talk about in this post . Government bonds are the most important part of any public debt of a country. But do you really know what they are and what they mean for the economy ? Want to know how to buy ?

What are government bonds ?

Before talking about bonds should remember what the public debt of a country. Throughout this blog we have insisted that states have financed basically two ways : via taxes or through debt. Through the latter half, the states going to the markets to seek funding , as if it were a loan , you borrow a certain amount of money , promising to repay the money borrowed along with the agreed interest over a period of time .

Government bonds are nothing more than debt securities that investors that acquire , and to provide the right to charge the state borrowed money with interest have been agreed . That is, if someone carries bond , you have paid a certain amount of money to a country , and this requires the State to repay the money with interest.

Note that this is not the only form of debt securities that exist . The bonds are purchased with a payback period of 3 or 5 years , that is, this will be the end of which time the state will pay you back with interest, and the country will serve to finance their debts or medium-term expenditure . The other debt that there are treasury bills , which are purchased from 3, 6 , 12 or 18 months , for the debts of the state in the short term , and obligations , of 10, 30 or even more years for the expenses you may have longer term .

The higher the repayment period is, the longer you stay the money the investor’s money in the hands of staff will interest receivable , primarily for two reasons : higher interest generated during that time, and on the other hand , the stakes are higher when we choose a larger repayment term , that is, the bonds have a higher interest rate than bonds , and these in turn to treasury bills .

How to buy the bonds?

Surely you’ve read in the papers this time once the bonds have a different interest in each issue. But how is that possible? Will the bonds do not have a fixed interest rate before purchase, such as bank deposits ? Not really. This all depends on the demand that exists for them. Each time the state needs money to finance , the bonds are issued , bills and obligations to the amount requested by the Government .

Public debt has traditionally been the most secure form of investment there . He had always been behind a whole to support the debt that an individual or institutional investor had with the state, and investors often rely more on a state usually in a private company.

Being a product so attractive , usually many people will be interested in acquiring a number of bonds, but as the amount of money issued by the state is limited , and there is usually more demand than supply , the acquisition is performed by the method public auction . Like any other auction , in which the more pujen those interested in the product , the higher your price, here would be the same , but with the performance , ie the more pujen , fewer will be willing to receive for their investment , with what the return will be reduced.

It is for this reason that , depending on demand , the interest payable will be higher or lower . Generally , the demand for bonds will be associated with risk investors perceive that they will refund your money. If , in principle, there is no risk , demand will outstrip supply , sometimes , this is not so , and the state has to accept the interest that asked investors who will buy that debt.

Who buys the bonds?

Any person , yourself, you can buy government bonds or letters or obligations . Right now, from the Treasury own page can be purchased directly , and incidentally put your little bit to help your country financing needs you may have.

But above all, what most influences public auctions are institutional investors , such as mutual funds or investment plans , the ones buying these low-risk financial products to guarantee part or all of the capital invested in the background.