Becki Patterson, Business Writer

Charles Ross, managing director of Sterling Asset Management, said his company ceased offering foreign exchange loans after the central bank notice. - File

Bonds to Jamaicans will never be as intriguing or tantalising as, say, foreign currency trading.

But if 'safe and reliable' is more of a turn on than 'quick and hot', then bonds are the right investment for you.

"The basis of bonds over shares is as simple as debt versus equity," said Charles Ross, managing director of Sterling Asset Management.

It's less of a risk. Should the company fail, the likelihood of recouping the initial investment, while not certain, is greater than an ordinary shareholder.

And if it is a government-issued bond, the chances of default are even less likely.

Ross noted, however, that as an investor, the logical thing to do is build a portfolio of investment instruments that are diverse, so that one's money is exposed to varying degrees of risk.

Investment instrument

If saving towards some long-term goal is central - maybe retirement or a child's university education - then an investment instrument that is predictable in returns, generally safe, and offers better than banking interest rates is just essential.

Bonds are typically debt instruments - a financial security issued for money that is, in effect, borrowed by a company, a government or sometimes, an individual.

Mostly, it is large corporations and governments who issue bonds to raise capital.

This loan can be for one to 30 or 40 years at the end of which the holder of the bond is repaid the principal invested.

The bond stipulates how frequently, and at what interest rate the holder is to be paid returns.

The interest rate can be fixed or variable.

Some of the more common types of bonds are:

Treasury bonds: Coupons bearing government securities with a maturity date greater than five years. Also known as T-bonds.

Bearer bonds - Bond certificates which can be held anonymously and used almost as freely as cash.

Convertible bonds: Bonds which carry a rate of interest and give the owner the right to exchange the bonds at some stage in the future for ordinary shares according to a prearranged formula.

Bullet bond: A bond where all the principal on a loan is repaid at maturity.

International bonds: Securi-ties issued by borrowers in a market outside that of their domestic currency.

In Jamaica the trading of bonds is licensed and regulated by the Financial Services Commission.

The attributes of the instrument would qualify it to be a 'debt security'.

It differs from buying shares in a company - a transaction that gives the shareholder 'ownership' in a firm.

It's a straightforward transaction through which the offerer of the bond is able to raise capital.

"The attractiveness of this for the issuer is that there is no middleman fee, such as would be incurred if a bank was approached for a loan," said Ross.

Attractive

"For the investor, purchasing these bonds are attractive from the perspective that the returns are usually higher than money in the bank and they may not necessarily be held until maturity or when the principal loan amount is due back."

This is where traders come in. Licensed dealers in the local or international capital markets analyse the yield curves of bonds and are positioned to make recommendations to their investors.

Two major factors they look at are the risk of default by the borrower and the risk that bond prices will fall due to fluctuations in the interest rates.

Companies are often rated from a triple A to a triple C status.

In Jamaica, the most popular bond are local currency issues by the Government.

In the overseas markets brokers note trades by a 'book entry form' much like lodging money to an account, but in Jamaica physical certificates are issued and the procedure of trades transacted by formal documentation.

The bottom line on bonds is that while they do not have the transitory glamour and hype of currency, or stock market trading, they have predictability - and when it comes to being able to count on having money nothing is more sexy and sophisticated.

beckipatterson@hotmail.com.