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When you’re ready to take your savings to the next level and invest it, you’ve got a choice to make. There are mutual funds, stocks and other securities in Ireland, but these types of investments can be daunting to new investors and returns can fluctuate wildly. Instead, consider investing in bonds, where your money will grow at a steady rate.
What are bonds?
A bond is a low-risk investment where you’re lending money to either the Government of Ireland or a company at a fixed interest rate for a predetermined period. You’ll receive interest payments on your investment regularly, and at the end of the predetermined term, you’ll get back your initial investment. Before investing in bonds, however, you should carefully compare your options as some bonds carry more risk than others.
Example: How do bonds work?
Edith has been transferring her spare cash into her savings account for the last two years but is now starting to seriously think about her retirement. She decided to invest in a treasury bond, which will pay her interest twice a year on the investment. This is a low-risk option for her savings that will pay her the full investment back in 30 years when she’s closer to retirement.
By choosing a government-issued bond for her savings, Edith is able to diversify her investment portfolio while keeping a percentage of her money in her savings account where she can still add to the balance, earn interest and withdraw those funds as needed. The interest earned on her government bond will be added to this account, where it will then earn more interest.
Types of bonds
Government bonds
Corporate bonds
You have a few different options when investing in bonds in Ireland. Each choice has its own risk/return profile, making it important that you compare your options carefully before deciding on any one product:
Government bonds
Government of Ireland bonds are issued by the National Treasury Management Agency with 3, 4, 5 or 10-year maturities. These bonds are usually used to finance government debt or fund capital investments, and as they are backed by the government, they have a much lower risk profile. However, this also lowers the potential interest you can earn from such bonds.
Corporate Bonds
This type of bond is usually a part of a public offer, where a company will issue a prospectus that informs consumers about the offering and allows them to make a direct investment. This is different from buying shares, where you are a part-owner and your investment can be affected by the cash flow of the business. With corporate bonds, you are a creditor and your return is limited only to the agreed-upon interest payments and the return of your principal investment. They usually have a higher investment rate than government bonds in Ireland but are also riskier — if the company fails, they may default on the debt.
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Are bonds safe?
Government bonds in Ireland are considered to be very safe, but there are bond options that can carry a high level of risk if you aren’t careful. Bonds are typically less volatile than other types of investments, such as shares, but it’s still possible to lose money with government-issued bonds. You can measure the risk of the bond through its credit rating, which you can find out from any licensed financial advisor in Ireland or from the bond prospectus.
Pros and cons of bonds
Like any investment, bonds have their own set of pros and cons:
Pros
- Low volatility investment
- Higher interest yield than savings accounts
- Potential tax benefits
- Clear risk ratings
Cons
- High minimum investment (some brokers in Ireland require you to purchase a minimum of €5,000 in bonds)
- Additional broker fees to buy or sell on the secondary market
- Less liquidity if you need access to cash
- Lower returns than stocks and other investments
- Risk of the issuer defaulting
How are bonds valued?
A bond’s capital value can increase or even decrease before the maturity date based on the current interest rates. The amount of interest accrued since the last payment will also affect the value of a bond. If interest rates drop, you’ll see an increase in the value of your bonds, whereas if rates rise, the value of your bonds will drop. These fluctuations are only relevant if you’ve invested in floating rate bonds as opposed to fixed-rate bonds because the interest varies in line with the benchmark interest rate.
How do I choose a bond to invest in?
If you are interested in diversifying your investments with bonds, you’ll first need to decide which type of bond is right for your financial strategy.
Individual bonds
| Type of bond | Issued by | Risk | Reward | Purpose | Taxes |
|---|---|---|---|---|---|
| Government bonds | Government of Ireland | Very low | Very low | Finance government debt, capital expenditures, etc. | Very low |
| Municipal bonds | Local government body | Low-medium | Low-medium | Finance municipal purchases and public projects | Tax-exempt |
| Corporate bonds | Companies | High | High | Finance growth, debt, capital expenditures, research | Taxable |
How to buy bonds
Now that you’ve decided which type of bond you’d like to buy, there are a few ways to make your first purchase in Ireland.
Primary market
If you’re looking to buy new-issue bonds in Ireland, you can purchase them on the primary market, which is usually directly from the issuer. You can purchase Irish Government bonds from the National Treasury Management Agency, which allows you to avoid transaction fees from brokers.
Municipal bonds are generally offered for a short time through a specific bank or group of banks. A prospectus would be issued, highlighting the different maturities and yields. During the offering period, you would need to put in a purchase request with the respective bank’s investment representative.
Most corporate bonds in Ireland are sold to large institutions and banks which sell them in the secondary market. While unlikely, you may be able to purchase them directly from the underwriting investment bank in an initial bond offering.
Secondary market
The secondary market is where you’ll find investors and other institutions looking to resell existing bonds. This is done through brokers, which are third parties in Ireland that allow you to purchase bonds from someone else. You’ll specify which bonds you’d like to purchase and the broker will search for another person selling them, then purchase them for you, often with a markup to cover commission.
Brokers can also help you resell bonds before they reach maturity. Once you’ve purchased a bond, you can choose to hold it until maturity or sell it on the secondary market. You’re not required to pick one or the other, so nothing’s stopping you from collecting interest then reselling the bond if its value increases.
Bottom line
Bonds can be a great way to keep your money safe over a long time and diversify your portfolio. If you’re a bit more risk-averse, splitting your savings between a traditional savings account and a government or corporate bond can help you earn interest on your money without taking on too much risk. Assess your financial situation and compare your investment options in Ireland to determine whether buying a bond is right for you.
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