How to get 5% steady annual income with low volatility?

With interest rates in Europe still at an all-time low, finding investment opportunities which generate good levels of consistent income without putting your capital at too much risk is not easy.

Instant access saving accounts across Europe currently provide you with a mere average rate of between 0 – 0.5% which in real terms mean that your purchasing power is being depleted because of inflation.

Therefore, the main question is, where to go from here? Savers will, quite rightly, be nervous to invest the majority of their hard-earned capital in instruments which can drastically change in value over the short term.

One of the markets which can provide a good level of income with low volatility is the Maltese Corporate Bond market. 

Malta, a small island nation at the central of the Mediterranean and with just over 316 square kilometeres in area, rich cultural history and warm climate has managed to distinguish its self over time. Being an EU member since 2003, the island has managed to diversify its economy from tourism and manufacturing industry to building a stable and robust financial services and gaming sector. As the economy grew over time and due to Malta’s strong regulatory framework, many local corporations have evolved and diversified their debt structures by issuing new bonds into the local market.

As a simple definition, abond is a debt instrument that can be issued by corporations to finance their projects or activities. In other words, a bond is a loan that the investor makes to the bond’s issuer. Therefore, the issuer receives the capital to finance its operations whilst promising to provide an agreed interest to the investor every year until the bond matures. At maturity the issuer will then repay all the capital back to the investor.

Although the price of a bond can vary, it is still considered a low risk investment compared to an equity or property purchase. Bonds can be issued by either governments or private corporate entities and the main difference between the two will be in the interest rate provided. Governments have a better credit quality and thus involve lower risk which in turn provides lower interest rate. Corporations, although they would be of a lower credit quality, would still provide the necessary desired protection whilst generate a higher interest.

In Malta for example, a typical corporate bond can generate around 4% interest which can increase to around 5% if the bond is not secured by any other asset should the company fail or is issued as subordinated*

One has to point out that the market in Malta is relatively small and thus liquidity might not be the same as the larger global economies. This can be advantageous since you would not see a lot of fluctuation in the price however it might be a bit more challenging should you wish to redeem your bond before maturity.  Having said that however, Maltese corporate bonds have always been a very stable investment and attract a lot of interest as new issues are generally oversubscribed in a matter of hours.

Attached below you can find a couple of examples for bonds recently issued in the Maltese market and the relevant terms.

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*Subordination means that the rights and claims of Bondholders in respect of the payment of capital and interest on the Bonds will, in the event of dissolution and winding up of the Issuer, rank after the claims of all unsubordinated debt and will not be repaid until all other unsubordinated debt outstanding at the time has been settled.

Past performance is not a guide to future results. This information is being provided solely for information purposes and should not be deemed or construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax or legal advice. Similarly, any views or opinions expressed are not intended and should not be construed as investment, tax and/or legal recommendations or advice.  No person should act upon any opinion and/or information in this document without first obtaining professional advice.

 

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