How to invest in multi-year treasury bonds

In this article we want to illustrate all the main features of the Long-Term Treasury Bonds (BTP), their use as a form of investment. Our goal is to provide you with the tools necessary to establish how to invest in multi-year treasury bonds (BTPs) and estimate their performance.

What are multi-year treasury bonds (BTPs) ? How do BTPs work? Is it possible to use BTPs to get a good return?

Surely the Multi-year Treasury Bonds (BTP) are one of the most popular financial instruments and it is therefore of fundamental importance to understand how they work and to know how to profit from the BTPs.

To better understand what the yield on multi-year treasury bonds (BTPs) may be, we must start from some basic concepts.

The bonds : they are cash loans that recognize a periodic interest to investors through coupons.

All the states issue bonds and in the case of the Italian State, these are called Government Securities or Treasury Bills (BTP). These loans recognize, through coupons, an interest at fixed intervals over time (which usually has a half-yearly frequency).

The BTPs ( Treasury Bonds ) have a maturity of 3, 5, 7.10, 15, 20, 30 and 50 years and guarantee a payment of the six-month returns.

The nominal value of the BTP is equal to 100 in conjunction with the issue and maturity. BTP taxation is 12.5 for the State (but increases to 26% for private individuals).

But what is the return on long -term Treasury Bonds (BTPs)?

But what is the return on long -term Treasury Bonds (BTPs)?

The yield on long -term treasury bonds (BTPs) derives from two components:

  • the coupon flow
  • the difference with the subscription price

Clarified that a Long Term Treasury Bonds (BTP) always has a nominal value of 100, we note that the price on the market of a BTP can vary, assuming lower quotations (for example 80) or higher quotations (for example 120).

To calculate the yield of net BTPs, regardless of their maturity, these parameters must be taken into account:

  • the BTP purchase price ;
  • the coupon, ie the interest that accrues on that BTP;
  • purchase costs, ie the commissions to be paid for the purchase of a BTP to the intermediary;
  • performance taxes, by law you have to pay taxes at 12.5% (for the State) and 26% for private individuals;
  • the tax on the issue spread, ie on the difference between the value of the BTP at the time of issue and the value at the time the investor takes possession of it.
  • the taxes on the capital gain, that is on the gain beyond the issue price.

From 2012 the BTP Italia is available from the Italian State, with a 4-year maturity. On BTP Italia you can invest a thousand euros or multiples of it. The investor can receive annual coupons paid every six months (for example, a 4% Italian BTP pays two half-yearly coupons of 2% each).

The yield of BTP Italia has a fixed rate, communicated at the end of the subscription period, and calculated on the revalued capital based on actual inflation in Italy.

At the expiry of the BTP, when the coupon is paid to the investor, two situations can occur:

Purchase BTP with price below 100

In this case, at the time of issue we purchased the BTP at lower value and therefore at maturity we realize a gain equal to the difference to 100, to which the 12.5% ​​tax must then be deducted.

Example:

  • Purchase: 90
  • Capital gain: 100-90 = 10
  • Tax on capital gain: 10 * 12.5% ​​= 1.25
  • Net repaid: 100 – 1.25 = 98.75

Purchase BTP with a price over 100

In this case, at the time of issue we purchased the BTP at higher value and therefore at maturity we realize a gain equal to the difference at 100 (capital gain) less the 12.5% ​​tax. In this case you will receive a net repayment that coincides with the nominal value.

Example:

  • Purchase: 110
  • Capital gain: 100-110 = -10
  • tax credit on capital gains: -10 * -12.5% ​​= 1.25
  • Net repaid: 100

What are the risks for those investing in multi-year treasury bonds (BTPs)

What are the risks for those investing in multi-year treasury bonds (BTPs)

If you purchase BTPs and intend to keep them until maturity, the only risk you run is the fact that you are a creditor and that, whoever issues the bonds, ie the Treasury, may not pay the coupons or repay the principal.

Another risk that you run is that of the market, that is, if you sell (for any reason) the BTPs before the expiry. In fact, if the market were to fluctuate and there was a rise in yields, the BTP price may fall, causing a capital loss.

Why invest in multi-year treasury bills (BTP)

Why invest in multi-year treasury bills (BTP)

Summing up we can say that investing in BTP is worthwhile for the following reasons:

  • BTPs are particularly suitable bonds for medium, long or very long term investments;
  • the BTPs guarantee fixed periodic coupons and therefore regular and predetermined collections;
  • BTPs have a medium / low risk, being issued by a sovereign state, if you keep them until maturity. First you could have capital losses if the market fluctuates upwards, especially with long-term maturities.

Investing in long -term Treasury Bonds (BTPs) is not the only way to profit from financial markets and their performance. Remember that you can also profit by using online trading.

If you want to take the first steps in the world of online trading and profit from CFDs, contracts for Difference, shares, bonds, etf, commodities, cryptocurrencies, without risking too much capital initially, you can take advantage of the advice and reviews that Mr Bank puts at your disposal. You can consider one of the brokers in the table.

High Yield Bonds

Over the course of these years we have experienced rating agencies, and the rating itself, as a sort of scarecrow that hovered around our lives. Many nations, including Italy, Portugal, Greece and Spain just to name a few, have been waiting in the last decade for the “votes” of rating agencies as when an elementary school child waits for report cards to find out whether he will have joys or pains.

But there are those who look forward to these negative votes; in fact, we are talking about speculators and financial operators who operate in so-called “high yield” bonds.

But what are high yield bonds specifically and how can you profit from their bargaining? In this article we try to give you an overview of high yield bonds.

WHAT ARE “HIGH YIELD” OBLIGATIONS

WHAT ARE "HIGH YIELD" OBLIGATIONS

To better understand what “high yield” bonds are, it is better to start from the meaning of the term “high yield”; it literally refers to the high yield that can be obtained from the sale of this type of bonds.

These bonds are those that the rating agencies have baptized with a minimum rating of BB, that is to say that these bonds have a rate of default on the part of the company or sovereign issuer and are therefore very risky.

This type of bond offers a return on the coupon that is periodically removed for the collection of higher interest rates than the average ones offered on the market.

But all that glitters is not gold; in fact, if you invest in high yield bonds, the risk that the debtor may default, with a consequent loss of the invested capital, is definitely very high.

You must take into account that those who invest in “high yield” bonds do not however only invest in the portion of interest that can be collected at the end of a given period, but also invests in the price difference of the “high yield” bond, between the price paid for the purchase and the repayment value of the security.

Pay close attention to the fact that if we are talking about “high yield” bonds, we are referring to bonds issued by unreliable debtors that potentially offer bonds with higher yields.

The market of “high yield” bonds has had a remarkable development in the last period, when investors, in order to get more profits, have turned to financial instruments that are decidedly riskier.

“HIGH YIELD” OBLIGATIONS: WE MAKE SOME EXAMPLES

"HIGH YIELD" OBLIGATIONS: WE MAKE SOME EXAMPLES

To better clarify what “high yield” bonds are specifically, let’s try to give some examples of this type of obligation, going to list the main features.

A very explanatory example of high yield bonds are those issued by oil companies. In fact, this type of “high yield” bonds offer very high returns, far higher than the average ones offered by the market, worth billions of dollars, but also with a very high default risk, even now that the monetary tightening imposed from the United States have raised rates.

Until 2014 the investment in “high yield” bonds issued by US oil companies was really throbbing at all given the high oil prices and low interest rates. In fact, high prices guaranteed high revenues while low interest rates allowed oil companies to finance themselves at low cost.

Now the situation is slowly turning upside down: in fact, revenues are falling and rates are rising, with a risk of default for the issuers, and relative loss of capital by investors in high-yield bonds, which are very high indeed.

Another very important fact for those who invest in “high yield” bonds is that of duration: in fact it is advisable for small savers who wish to invest in this type of bonds to do so only with a small portion of their financial portfolio and for securities with a duration short. This above all for a reason: the market of “high yield” bonds generally has an offer of entry greater than that of exit, therefore one could be found for a fairly long period without the liquidity invested.

HIGH YIELD BONDS: OUR CONCLUSIONS

HIGH YIELD BONDS: OUR CONCLUSIONS

Let’s try to draw some conclusions after this journey among high yield bonds. These types of bonds can be an interesting investment opportunity as long as these conditions are met:

  • Duration of medium-court obligations;
  • Invest only a small part of your total capital;
  • Constantly monitor the market on which to invest, to avoid sectors in “crisis” smell;
  • Check the currency in which the securities are issued to avoid currency exchange costs.

We hope that our review will be useful for you to better calibrate your investments and to choose the most appropriate way for your investments, always following you carefully by a specialist in the sector.

If you want to take the first steps in the world of online trading, without risking too much capital initially, you can take advantage of the advice and reviews that Mr Banca puts at your disposal. You can consider one of the brokers in the table.