Saturday, July 28, 2012

Exchange Trade Bonds (ETB)

When I first heard of Exchange Trade Bonds (ETB), I just wonder, what's that. Luckily, Bursa gave us some explanation. According to Bursa, this is the "product" that they will introduce to all retail investors by 3rd quarter of 2012. In fact, I don't understand why make the name so complicated, it a bonds, so just call it a bonds, simple and straight forward.

For retail investors, what we more interested is how to make money? Usually, bonds yield range from 3% to 4% (unless you buy a junk bonds which provide high return), buying bonds and keep till maturity, the return is just similar to Bank's FD. The question is how to find oasis in the middle of desert?

However, if you understand the relation between country's economy and interest rate, then trading in bonds will become very exciting! For example, if generally people expect a country's economy will become worst, then their bond price tend to trade high in value. The reason is because investors seek safe heaven and avoid taking additional risk and switch funds from equity to bonds.

Today, if interest rate going down and expect to down further, then the bonds will sell like hot cake, investors tend to rush and buy the bonds of that country. Some will wonder why bonds price become bullish when interest rate go down.

Generally, history will repeat, fund managers usually buy bonds and make money in three different way. First, buy bonds and keep till maturity. Second, make use of short term interest rate movement to earn the price different from buy and sell bonds. Third, buy the bonds of strong currency, as strong currency will always support the bonds price plus the coupon rate as bonus.

Once you understand this and know how to capture the timing, invest in bonds for period of 5 to 10 years will become very profitable. The interest receive from bonds can be used to invest again when the bond price drop to very attractive level. In this way, we can make use the effect of compounding to grow the principal. Perhaps it's time for Bursa to organised courses for retail investors on how to make money from bonds investment.

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