If you ask on the street or even people who have fixed income hired, they will surely not know how to make real money in this way. Surely they will tell you that they have hired some bonds from their bank or from an autonomous community and that they give them a negligible, 5% annual return.
Fixed income is safe
They will also tell you that the fixed income is safe and that the bag is already startling. Yes, this statement is true but to some extent. We have to remember that, for example, senior bonds are quality debt but are not covered by any state guarantee fund, the issuer covers it with its equity.
Although in the priority scale they are followed by deposits, mortgage bonds and creditors / suppliers, that is, we have a high priority of collection since we pass in front of the subordinated debt, preferred shares and shareholders, who are the last to collect In case of bankruptcy.
Well, earning money charging interest on fixed income is the easiest way and that does not involve more complication than buying, collecting coupons, and waiting for their maturity where they will reimburse us 100% of the invested capital.
But what do we do to make real money with fixed income?
Simple. Most fixed-income securities are listed on the AIAF through the electronic trading platform SEND, that’s where people sell and buy according to their needs. There are other markets such as Frankfurt, but today Spanish is an example.
Depending on the situation of the company that has issued the debt, the current situation of interest rates and some conditioning factors plus such debt will not be as attractive or will be more, still, than at the beginning.
For example, a company launches 5% APR bonds, the first day of trading the issue will be 100% of the nominal value, which means that your investment is worth the same for what they have bought, but after a few months the interest rates ECB rise and 5% is no longer as attractive as before, which means that if someone wants to sell their securities they have to make a price discount . This is the daily quote.
If at that time the issue is quoted at 90% of the nominal amount and your purchases, you are buying the same titles as the one that paid 100% but you pay 90%, that is, purchases with a discount of 10% and the good is that the interest you will receive is over the total nominal amount, so you will no longer charge 5% but more.
Through our fixed-income broker
With an example it is perfectly understood. Bonds that came out at a nominal value of 1000 euros (per title) at 5% APR after a period of time traded at 80%. We want to buy and through our fixed-income broker we launch the order, well, we have bought a 1000 title for 800 euros. If when the title was worth 1000 euros (100% of the nominal) the profitability was 5% (100 * 5 / 100) Now profitability has risen since it is the same but on less money invested (100 * 5/80), 6.25%!
If the fixed income is quoted at 50%, it will mean that with the money you used to buy a bond you can now buy two, therefore the profitability is already 10% (100 * 5/50)
A real and topical example: The Catalan Generalitat bonds that came out in March 2012 to today, June, are quoted at 90%. Someone who buys now will get an annual return of 5.55% instead of the 5% that the one bought the first day will get.
Now comes the good. We have bought for 80 a thing that was worth 100 but it is that the day that the fixed income reaches its expiration they will return 100 to us, with which the profitability increases significantly.
This is making money with the capital gains of buying at a discount.
Example. We buy an ongoing issue that trades at 80%, which is plenty. He still has 2 years to win. We buy 10 titles of 1000 euros of nominal but that quoting at 80% costs us a total of 8000 euros, that is, 10 titles for 8000 euros.
Fixed income offers us a profitability of 5% APR, in two years 12.50% since it is over 8000 and not over 10,000, not bad. But on the day it expires, 10,000 will be returned to us, with which we have to add an additional 2000 euros to profitability.
At the end of the two years we obtain a 20% return on capital gains and 12.5% on interest, added 32.5%! Or what is the same an annual 16.25%.
The coupon run
When we buy some second-hand bonds we have to pay the part of the coupon that would be the one who sells them. That is, if you pay 6% APR with a semiannual coupon and we buy in June (just before the coupon collection by the seller) we will have to pay what you have to pay, the coupon, that is, the price that we will pay for the bonds, for example of 90% of the nominal one, we would have to add an additional 3% of the semiannual coupon that would have to be collected in the middle of the year.
This is how people earn money with fixed income. It has its risks as everything but betting on solvent and front-line companies there should be no major problem. Another thing is to want to earn a fortune by buying emissions with a lot of discount and wait for the amortization, as for example, with Bankia, which currently has 14% issues.
Finally you can also earn money without the counterparty having to lose. There are high quality issues that are listed above 100%, either because of the solvency of the company or because interest rates have fallen and there is more demand for our bonds.
It is necessary to look for a good broker for fixed income that has acceptable commissions and buy always understanding all the concepts, security, maturities, coupons, amortizations, quotation …