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  • FIRST POST
    • justme111
    • By justme111 20th Apr 17, 2:49 PM
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    justme111
    Silly question about bonds
    • #1
    • 20th Apr 17, 2:49 PM
    Silly question about bonds 20th Apr 17 at 2:49 PM
    Reading about allocations and risk and volatility all the statements seem to suggest that bonds are more secure. Can someone please kindly explain me how can it be . If funds are investments into many different companies bonds are debt obligations issued by one organisation only, ie they are far less diversified. So what would happen if company issuing a bond becomes insolvent/bankrupt in economic downturn? Would those bonds be worth pixels on pc screen they are typed on? I understand in hierarchy of obligations bonds would be higher than shares (what we have in funds) , is the difference in risk/volatility just due to it or there is anything else I am missing ? It is of academic interest as for now(a couple of years at least) I am not going to buy any bonds , just want to understand the topic better.
Page 1
    • coyrls
    • By coyrls 20th Apr 17, 3:08 PM
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    coyrls
    • #2
    • 20th Apr 17, 3:08 PM
    • #2
    • 20th Apr 17, 3:08 PM
    If funds are investments into many different companies bonds are debt obligations issued by one organisation only
    Originally posted by justme111
    and bond funds are investments into many different bonds issued by many companies and/or governments.
    • dunstonh
    • By dunstonh 20th Apr 17, 3:13 PM
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    • #3
    • 20th Apr 17, 3:13 PM
    • #3
    • 20th Apr 17, 3:13 PM
    And bonds are not about being more secure. On a typical 1-10 risk scale, bond funds cover risks 2-8. Its about reducing volatility if you stick to the lower risk end or increasing diversification if you move to the riskier end.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • HappyHarry
    • By HappyHarry 20th Apr 17, 3:17 PM
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    • #4
    • 20th Apr 17, 3:17 PM
    • #4
    • 20th Apr 17, 3:17 PM
    A single company's bonds tend to be more secure than that company's shares.

    This is because in the event of a company failing, the company's creditors (including bond-holders) are paid out before anything is paid to shareholders.

    So, a pool of company's bonds would be considered to be a lower risk than the same pool of company's shares.

    However, as dunstonh says above, there are many different bond funds covering many different risk levels.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • Linton
    • By Linton 20th Apr 17, 3:21 PM
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    • #5
    • 20th Apr 17, 3:21 PM
    • #5
    • 20th Apr 17, 3:21 PM
    If you are only concerned about the risk of a company going completely bust, then yes both bonds and equity could be worthless. However if the company has some assets remaining bond holders have priority over shareholders.

    The more common situation is if the general stock market falls or an individual company hits a downturn but doesnt go bust. In those circumstances the share price will fall, possibly to very low values. However the bond, if held to maturity, will continue to pay out the same interest and will eventually refund the face value. If the bond isnt held to maturity you will be interested in the resale value on the secondary market. The bond price is underwritten by the guaranteed interest and repayment at maturity. This has a calculatable value and as long as the market believes that the company isnt going to fail the resale value of the bond should remain relatively constant. Any fall in price will tend to be countered by investors willing to take the risk for higher income.

    In difficult economic times the prices of bonds generally may well increase if concerns about the stock market cause investors to prefer their relative security.
    • SouthLondonUser
    • By SouthLondonUser 20th Apr 17, 3:50 PM
    • 91 Posts
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    SouthLondonUser
    • #6
    • 20th Apr 17, 3:50 PM
    • #6
    • 20th Apr 17, 3:50 PM
    The bond price is underwritten by the guaranteed interest and repayment at maturity. This has a calculatable value and as long as the market believes that the company isnt going to fail the resale value of the bond should remain relatively constant.
    Originally posted by Linton
    ? Even if the outlook for the issuer of a bond remains unchanged, the price of the bond is still a function of interest rates. If interest rates go up, the price of a bond goes down, and viceversa. Google 'bond duration' and 'bond convexity' to read about the sensitivity of a bond to interest rates/
    • Linton
    • By Linton 20th Apr 17, 6:15 PM
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    Linton
    • #7
    • 20th Apr 17, 6:15 PM
    • #7
    • 20th Apr 17, 6:15 PM
    ? Even if the outlook for the issuer of a bond remains unchanged, the price of the bond is still a function of interest rates. If interest rates go up, the price of a bond goes down, and viceversa. Google 'bond duration' and 'bond convexity' to read about the sensitivity of a bond to interest rates/
    Originally posted by SouthLondonUser
    The OP was talking about the relative risk of bonds and equities, the fact that bond price variation is constrained by the tie to fixed interest and guaranteed value at maturity ensures that bond prices are not going to vary wildly compared to an equity.

    Choosing a typical bond at random I see that a Lloyds 2025 maturity bond has varied between about £85 and and £135 since it was issued in 2010. Lloyds shares varied between 25p and 85p in the same period. The buyer knows that the price of the Lloyds bond will be £100 in 2025
    • SouthLondonUser
    • By SouthLondonUser 20th Apr 17, 11:13 PM
    • 91 Posts
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    SouthLondonUser
    • #8
    • 20th Apr 17, 11:13 PM
    • #8
    • 20th Apr 17, 11:13 PM
    I see; I suppose I read the answer a bit out of context - apologies.
    • justme111
    • By justme111 21st Apr 17, 8:11 AM
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    • #9
    • 21st Apr 17, 8:11 AM
    • #9
    • 21st Apr 17, 8:11 AM
    Thank you very much , I think I got an answer to my question. Bond is a source of a defined fixed income and it is going to be there and it is going to be redeemed at a fixed price unless the company went bust. Which although happens is not that common.
    Info about bond funds and volatility not being synonymous to risk and reverse correlation between bond prices and inflation is interesting as well.
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