When most Ghanaians think of investing, their minds often go to Bonds. Bonds offer individual investors the opportunity to build long-term, passive income which, when reinvested, can lead to long term wealth creation. While they don’t promise the adrenaline rush of sudden stock gains, they offer predictable, reliable income.
What is a Bond?
At its core, a bond is a loan. When you buy a bond, you’re lending money to the issuer (the entity receiving the loan). In exchange, the issuer (government, municipality, or a company) promises to pay you interest at regular intervals (usually bi-annual) and return your initial investment at the end of a fixed period called the maturity date. This simple structure is what makes bonds such a reliable tool for passive income/wealth building with lower risk compared to other asset classes.
Predictable Income
One of the main reasons investors turn to bonds is their predictability. Unlike stocks, which periodically pay dividends based on the company’s performance, bonds pay a fixed interest rate which is pre-determined in a contract note. Both stocks and bonds fluctuate in the secondary market. However, stock prices are generally more volatile due to earnings sensitivity and market sentiment, whereas bond prices, primarily driven by interest rates and credit risk, tend to exhibit comparatively lower and more stable price movements, particularly for high-quality issuers. For someone building passive wealth, this means you have a reliable stream of income that works for you automatically, whether you reinvest it or use it to cover expenses.
While no investment is entirely risk-free, bonds are generally considered safer than stocks. Government bonds are backed by the full faith of the issuing government, making default extremely rare. Bonds issued by companies (corporate bonds) tend to carry lower risk compared to equities, but this is usually dependent on their credit rating. Investment grade bonds tend to carry less risk, whereas junk bonds can be even more risky than equities. This stability makes bonds the ideal foundation of a passive wealth strategy. They protect your capital while still generating income, giving you peace of mind as your portfolio grows.
Are Bonds Entirely Risk-Free?
The short answer is no. Although bonds are generally considered lower-risk instruments relative to equities, they are entirely not risk-free.
This was clearly demonstrated during Ghana’s Domestic Debt Exchange Programme (DDEP). On 5 December 2022 when the Government of Ghana announced an invitation for the voluntary exchange of approximately GHS137 billion of domestic notes and bonds (including E.S.L.A. and Daakye bonds) for newly issued instruments with revised terms.
The DDEP underscored several key bondholder risks:
- Income Risk: Coupon payments were reduced, deferred, or suspended, disrupting the predictable income stream investors depended on.
- Maturity-Extension Risk: Many instruments were restructured with longer tenors, effectively locking in capital for extended periods.
- Liquidity Risk: Investors faced constraints in accessing funds when needed, particularly amid tight domestic liquidity conditions.
The episode illustrates a fundamental principle in fixed income markets: while bonds may offer contractual cash flows, those obligations are ultimately contingent on the issuer’s capacity and willingness to honor them. Even sovereign debt is not immune to restructuring under fiscal stress.
Diversification: The ultimate strategy
A well-rounded investment portfolio balances risk and reward, and this is where bonds shine. By including bonds alongside other investments such as stocks, mutual funds, real estate, or other assets, you reduce overall portfolio volatility. Even if the stock market dips, your bond holdings continue generating predictable income, helping to stabilize your wealth accumulation journey.
Conclusion
Bonds may not be as attractive as skyrocketing stocks, but they can play a key role in building passive income/wealth. They provide stability, predictability, and the opportunity for compounding: all essential ingredients for long-term financial growth.
In the journey toward financial independence, think of bonds as the quiet, patient partner: they may not dazzle you day-to-day, but they steadily push you closer to your wealth goals, one interest payment at a time.
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The information contained in this blog is being provided for educational purposes only and does not constitute a recommendation from any Bora Capital Advisors entity to the recipient. Bora Capital Advisors is not providing any financial, economic, legal, investment, accounting, or tax advice through this blog to its recipient.
This report reflects the views and opinions of Bora Capital Advisors Ltd, and is provided for information purposes only. Although the information provided in the market review and outlook section is, to the best of our knowledge and belief correct, Bora Capital Advisors Ltd, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this report, except as required by law. The portfolio performance data represented in this report represents past performance and does not guarantee future performance or results.
