When it comes to investment, most of us do very little research before putting money in a particular investment.
To many, hearing that someone has earned big is often sufficient research. Over the last decade or so, a number of corporate companies have issued shares to the general public. Some of these listings led to a doubling in share values in weeks.
Needless to say, savvy people made good returns on their investment when they sold at higher prices, while others have made losses as prices have plummeted on certain shares. Different investments bear their own characteristics. The decision to choose one over another or a combination of these should depend on one’s needs, investment timeline, and risk appetite, among other reasons.
Bonds and treasury bills are relatively popular investments. However, how these investments work is seldom understood. Bonds are a type of fixed-income investments. This means that the issuer, issuing company or government promises to pay the investor the maturity value or principal on the maturity date, and to pay interest either at stated intervals over the life of the investment or at maturity.
Bonds trading in the market today come in a multitude of varieties to suit investors’ and borrowers’ needs and costs. Bonds may be issued by corporate companies like banks and insurance companies or by the government. Some bonds are secured by physical assets in case the issuer can no longer meet their obligations while other bonds are not secured, like those issued by government.
The details of the bond are always outlined in a trust deed and written into a bond contract. This contract should be carefully read as it outlines the payment and each party’s obligations, among other things.
Treasury bills on the other hand are short-term government obligations. The Ugandan government offers treasury bills for as short as 91 days. Unlike bonds, they do not offer an option of paying interest. Instead, their maturity value will be higher than the invested value depending on the prevailing rate of return.
Your specific financial needs and goals should determine your investment. Peter pays tuition for his daughter at university twice a year so he opted to invest in a corporate bond that paid him interest semi-annually and enabled him to take care of that obligation. At the end of Peter’s bond term, he would get his principal back.
On the contrary, Becky a business lady in Owino, had a large sum of money that she was only going to use in three months’ time, so she invested in treasury bills to make a decent return in that short period.
Further, it is also prudent to make sure that the investment broker you are dealing with is licensed by the industry regulator - the Capital Markets Authority in the case of Uganda.
The author works with TD Insurance, Canada.