Tyler Story
1.2 Discussion
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When deciding if you should invest in any sort of financial instrument, one must consider the many factors that can determine the expected return on that asset. One of the first things that I would consider would be the duration of the investment and how long I would like to hold onto it for. The longer duration a bond has, the more risky it becomes, and in turn, the higher yield it must have in order to justify the duration. “For bonds that mature in a year or less, the economic environment tends to be more predictable – rather than a bond with a 30-year lifespan, which can be more prone to interest-rate risk. So there is less risk with short-term bonds, which translates to lower returns” (Likos).
For bonds and other debt securities I would also be looking at the credit worthiness of the bond through a financial rating website such as Moody’s. The US government issues treasury bonds which are notably the least risky bonds on the market but once again in turn lead to very small returns. An investor must be able to recognize what bond ratings produce what returns and calculate how much they are willing to risk to hit their target goals. Speculative bonds and other lower grade bonds can produce much higher returns than AAA or some BBB rated bonds and carry default risk that is passed on to the investor.
In short, at this time I feel that having a small amount of debt securities (maybe under 5-10%) is a smart choice for anyone looking to diversify their portfolio. Personally I do not have nor do I plan on having debt securities at the moment due to their low return expectations and I feel that the return from bonds is currently being eaten away at by the national inflation rate. Understanding your opportunity cost as an investor as it is important to put your capital in the areas where your risk profile is set. For this reason, no I would not invest my money in debt securities at this time.
Source:
https://money.usnews.com/investing/investing-101/articles/should-you-invest-in-debt-securities
Fernando Oliveira
Debt securities
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Credit risk, maturity date, liquidity and volatility in value are for sure factors to be considering when assessing whether to invest in debt securities or not. Deciding the debt security to invest on will depend for sure on the investor’s risk aversion. In my view, investing in debt securities such as US government debt is always a good time to invest.
Foreign investment will always depend on risk aversion and political scenario of democratic economies and will required deeper analysis on volatility, credit risk.
As an example, I would avoid Latin American countries debt securities, except Brazil, as I believe there is a high credit risk. As an example, Argentina recently faced difficult times on renegotiate its debt with IMF (International Monetary Fund) at the same time Argentina reduced its capacity to sustain its foreign debt obligations which pushes the country to decide between borrowing more money or further reducing expenditures on basic services.
In the other hand, Brazil has a more recent history of repaying its debt and despite the political scenario and inflation at 6% a year, the high interest rate of 11.75 per cent turns the country in a very attractive investment. Here is where I would invest my money, where Brazilian Reais is also appreciating against US Dollars in the last few months, which should be considering when assessing the yield over the investments as pointed out in the book Financial Markets and Institutions (Madura, 2018).
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When selecting whether or not to invest in a financial instrument, you must consider a variety of factors that can influence the asset’s predicted return. One of the first things I’d think about is the investment’s length and how long I want to keep it. The longer the term of a bond, the riskier it gets, and the greater the yield required to justify the duration. “The economic situation tends to be more predictable for bonds that mature in a year or less, rather than a bond with a 30-year lifespan, which can be more prone to interest-rate risk.” As a result, short-term investments have a lower risk.
