The world of credit. Cash and carry was the old way of doing business in Bermuda. If you had the cash, you could carry your purchase off, knowing that those next in line who couldn't produce the cash, were going to pay more, at least 10 percent more, even if they could get credit.

No cash - no credit - no choice - no life; that is how powerful the credit world is. If you couldn't get credit, or aren't deemed creditworthy, you've just undergone a major power shift in your personal, corporate or countrywide life. You've immediately become a supplicant, going back as an individual, hat-in-hand, to politely beg; as a business with dressed up corporate financial statements to launch new share or bond offerings; or as a country, government groveling to find something of credit quality to use as security to back-up (collateralise) this borrowing request.

Cash and credit are huge mediums of exchange in the global commercial marketplace. Trust is also implied within the equation, but truth be told, the ability to trust someone, some company, some government to pay you back when you extend credit to them is often abused and dishonored. Thus, appropriate process when and wherever possible is to secure an arrangement whereby you as the lender can force repayment by stated means within the contract. The most common method is by taking possession of the item posted as collateral in lieu of the monies due, but never paid, to you.

In a world where a man or woman's word is not what it used to be, and handshakes are looked on an germ-ridden providing an excuse to use sanitiser, collateralised credit provides the stability at the bottom of the lending pyramid.

Country's and governments borrow money by several means: they may borrow by using as collateral of income (and concomitant taxes) against present and future natural resource productions such as precious metals mining , for instance; or against large agrarian crop productions; or, against certain land and buildings allotted for sale to foreigners; or, by issuing bonds to their citizens and international investors. The collateral might simply be as intangible as the ability to generate multiple-facilitated business environment through a highly stable political and governmental environment, a highly-respected financial, judiciary, legal and regulatory structure, a democratic resident process and a free press. These attributes are more intangible, however, and cannot be collateralised as easily. Honestly, how can you secure against pink sand, sunny skies, and teal blue water?

Country credit ratings by global rating agencies become very, very important.

Bond Rating Chart

Source: Investopedia, Bond Basics

Companies wanting to borrow have more than a few ways to secure their credit partners. In plain English this means providing the assurance that the creditor will get his money back. Credit agencies rate a company's financial strength by thoroughly assessing many criteria: their sales revenue, the markets they do business in, their expense ratios, combing through their inventory and real property asset listings, visiting audited financial statements, independently verifying their liabilities and cash flow and many more financial and non-financial items. Yes, you need good cash flow even though you are borrowing money. Every publicly-traded company, indeed, trading partner governments also receive a credit rating by, at least, one of the big rating agencies. A Good rating can push up the price of the company stock, provide favourable lending terms, as well as giving a quality rating to a company bond issuances.

So, how do you know that your bond investments are credit worthy? There are several inverse statements that you should understand thoroughly about bonds as you learn your way into this investment field.

The higher the bond credit rating (see accompanying chart), the lower the interest rate. The US dollars had been on the trash end of talk over the past few months, but take any day in the market when volatility is high. Everyone and his mother will pile into US Treasuries in a typical 'flight to safety' reflexive action. You are paying for the lack of risk premium implied within this safety. Short term US bonds pay very low rates compared to other longer dated bonds, other country bonds, and corporate bonds. That is precisely the point.

The lower the bond credit rating, the higher the interest rate. And now consider these.

Credit ratings of Argentinean and Brazilian bonds over the years have varied, but have been certainly lower than the United States and United Kingdom issued bonds (Treasuries). Argentina defaulted on their debt in the early 2000's, so much for that high interest yielding rate. More close to home, Trump bonds, years ago paid 20 percent.

What a rate, and what a risk, one only need to ask one question with such high interest rates. Will I get my original principal investment back? The answer, of course, is that you know it because who is going to fly to Argentina and demand satisfaction from the government for recourse. If you are a conservative investor, do not take the bait when sales representatives rave about the high yield of emerging market or corporate debt.

This, by the way, applies to any request for a major loan, especially to a small business investor. Until and unless, you get your loan collateralised with some tangible piece of property, such as real estate where you have a right to force the sale for non-payment, pass up the chance. You work too hard for your money to see it walk away. Is this cynical, not really? It happens again and again and again. An unsecured personal loan is no different than an unsecured bond.

Thus, endeth the lesson for today.

Next, how do you trade bonds? How do you pick bonds and should you own single positions or a bond fund. Owning bonds can concentrate risk, too.

Martha Harris Myron, CPA, CFP(US) TEP(UK) JP- Bermuda is an international Certified Financial Planner™ practitioner. She specialises in independent fee-only cross-border tax, estate, investment, and strategic retirement planning services for Bermuda residents with cross-border and multi-national connections, internationally mobile people and US citizens living abroad. For more information, contact martha.myron@gmail.com or 735-4720.