The price of a bond itself is determined by several factors including interest rates, supply and demand, credit quality and maturity. From the date the bond is issued until it matures, the price of the bond can go up or down because it is exposed to fluctuations in market conditions, interest rate changes and variations in credit quality. A bond’s ‘yield to maturity’ is the total of all the interest you receive from the time you purchase the bond until the time it matures, plus any difference between the price at which you purchased the bond and its face value or ‘par’.

The interest rate for different bonds varies – and the MFSA is keen to stress that your investment decision shouldn’t be based entirely on the highest rate of return that a bond promises. This is because safer investments generally have lower interest rates: the promise of higher yields signals a greater risk to your investment. It is important therefore to understand the risks to which you expose your money when you invest in a bond.

The risks can be associated with the interest rate whereby a change in this rate can affect the value of the bond; there could also be credit risk where the issuer can’t repay the bondholders, and an inflation risk which can reduce the value of your return. Some risks are correlated with the company issuing the bond, and their status as financially sound and creditworthy. Other risks are related to the overall economy and the general industry, the company operates in. The MFSA suggests that you should check these out by looking at the bond’s approved prospectus which would be available on the MFSA website. There is other helpful literature available on the MFSA website.

Credit ratings are a way to measure risks, although bonds are not always rated. As an investor you might come across terms such as ‘Triple A’ or simply an ‘A’, ratings given to a bond when it is issued. Rating agencies such as Standard and Poor’s or Moody’s, monitor the ability of bond issuers to pay both interest and principal payments when they are due.

The MFSA is clear: you should always check whether a bond is ‘secured’ or ‘guaranteed’, but don’t stop there. Check the quality of the security and/or the guarantee. Secured bonds are generally backed by assets such as property, so if the company issuing the bond has difficulties paying the interest and/or the original principal, the investors have a claim against the property. But be careful, the value of the property may be insufficient to cover all the claims. In the case of a guarantee, it is always important to check the financial soundness of the guarantor. 

To make sure you are choosing the bonds that suit you best, the MFSA recommends that you consider seeking advice from an independent financial advisor.

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