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What are Capital Investment Bonds?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 October 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Capital investment bonds are a type of bond issue that makes it possible for investors to generate profit each time that the associated stock experiences an increase in price. At the same time, the structure of the bonds protects investors in the event that the market prices decrease for a period of time. While this approach does help to minimize the risk associated with the investment, there is still the possibility of not receiving any type of interest payment on the bond, if the underlying securities remain flat or otherwise fail to generate any type of increase.

Like many types of bond issues, capital investment bonds are structured with a maturity date. This provides investors with some idea of how long the principal investment will be dedicated to the issue. In addition, the presence of a maturity date allows potential investors to consider the underlying stocks and project how they will perform between that date of purchase and the date of maturity. Assuming that there is reason to expect the stocks to increase in value, there is a good chance that purchasing the bonds will result in at least a modest return.

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One factor that is a little different with capital investment bonds is that the duration can be shorter than other types of bond issues. While many other types of bonds, such as government bonds, municipal bonds, or even corporate bonds, will have a duration of at least one year, it is possible for capital investment bonds to mature in as little as three calendar months. Some bonds of this type also allow investors to add to the original investment during the life of the bond, a factor that helps to increase the potential return. For an investor who is looking for a relatively risk-free investment with a quick turnaround, a bond issue of this kind may be an ideal fit.

As with other bond issues, the returns that can be reasonably expected from capital investment bonds are modest in comparison to stocks or commodities. At the same time, the risk of incurring a loss is very low. Depending on what type of management costs are associated with holding the bond issue, it is conceivable that those costs could eat into the principal if the bond ultimately does not generate any type of interest. Typically, the costs are deferred by the interest earned over the life of the bond, leaving a small amount of profit to return to the investor, along with the principal at the time the bond matures.

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