Corporate Bonds

Teak

Didn't find anything from Martin about them..so are they worth investing in?

cheerfulcat

Have a look here.

Aegis

In terms of direct investment risk/return level, they rank somewhere between local authority stock and UK equities. If you want some relatively low risk investments to sit in your portfolio, then they might be worth getting. I have some exposure to bonds through one of my unit trusts at the moment, so that's an option if you'd prefer that to direct investment.

purch

It depends whether you want to invest directly i.e. hold the bonds yourself or to invest through a collective investment vehicle.

In my opinion the risk relating to Corporate Bond Funds is sometimes underestimated. Because the fund will hold lots of different Bonds with different maturity dates your capital can still be at risk of depreciation depending on market conditions.

In the U.S. the concept of holding some or even all your portfolio in Bonds is far more common that in this country, probably due to the larger amounts of different Bonds marketed.

Buying a Bond and holding to maturity can be a sensible strategy, if it fits into your overall financial plans. It also takes a totally different physcology. You don't need to continually watch the market value of your Bond, as you are holding it to maturity so you know in advance when you will get your Investment back, and how much it will be. You also receive the set coupon interest every 1/2 year, so as long as you have a strategy for re-investment of the interest you will benefit from compounding too.

Direct investment in Bonds takes a lot of research as the risks associated are very different to holding Stocks

There are lots of good Books written on the subject, mainly from an American perspective but still informative and useful if you want to follow this path.

dunstonh

Like any investment, you wouldnt put all your money in there (not unless you are a bank customer seeing a bank tied agent and then you expect that sort of poor quality advice).

They do have their merits though and whilst the last year hasnt been good, a lot of that is down to increases in interest rates. why have corporate bonds when cash is better. However, you should aim to buy fixed interest when rates have topped out and future trend appears to be down. Is that time now or not far from now? Of course we cannot tell without a crystal ball but from a downside perspective, they are quite useful.

Also, fixed interest funds vary in risk a heck of a lot. You can get very low risk funds and very high risk. So you should never assume risk just because something has bond in the name.

debbie42

I've never really got my head around exactly what corporate bonds are, but think I'm nearly there now, thanks to recent discussions and some other stuff I've read.

It's a bit like taking out a long term fixed rate savings account with a building society. However you can't take the actual cash out, but you can buy and sell the ownership of the bond during its lifetime. Is that right so far?

dipsomaniac

corporate bonds are similar to gilts but are offered by companies instead of the uk government.

a company will issue a corporate bond to raise funds, most will pay a fixed rate of interest for borrowing the money and are traded on markets just like shares.

debbie42

dipsomaniac wrote: »

corporate bonds are similar to gilts but are offered by companies instead of the uk government.

a company will issue a corporate bond to raise funds, most will pay a fixed rate of interest for borrowing the money and are traded on markets just like shares.

So, turning that around, gilts are effectively like corporate bonds, but offered by the government?

Also, I've read something similar to your last sentence before, but it didn't really make complete sense to me, I'm afraid. Is my statement in the previous post a similar way of interpreting it (apart from the fact that I've missed the interest payments out)?

dipsomaniac

most private investors will invest in corporate bonds through a fund. the fund will have a yield - this is the amount of income that the underly corporate bonds pay out every year expressed as a percentage of the buying price.

say you pay £1 for the bond and it pays 6% interest per year. you can withdraw the £6 every year as income or you can re-invest it. the £1 you inititially paid for the bond will fluctuate with market conditions. when you come to sell it may be worth £1.05 or it may be worth 95p.

debbie42

dipsomaniac wrote: »

most private investors will invest in corporate bonds through a fund. the fund will have a yield - this is the amount of income that the underly corporate bonds pay out every year expressed as a percentage of the buying price.

say you pay £1 for the bond and it pays 6% interest per year. you can withdraw the £6 every year as income or you can re-invest it. the £1 you inititially paid for the bond will fluctuate with market conditions. when you come to sell it may be worth £1.05 or it may be worth 95p.

So a fund has (effectively) a rolling stock of bonds, as a particular bond does have a finite term if purchased directly?
Does the yield change for a fund after purchase?

purch

gilts are effectively like corporate bonds, but offered by the government?

Bonds vary in quality ( the quality can be determined by the different rating given to them by the main rating agencies, S&P, Moody's or Fitch ).

Whilst Government Bonds ( Gilts in the case of the UK Gov ) are usually highest rated, some Corporate Bonds can be rated much lower.

A company like Boots Plc has it's Debt rated only B2 by Moody's, so the Yield on a Bond issued by them should be 150 to 200 basis points higher than a similar Gilt

Example:

Boots 5.5% Bond maturing in May 2009 has a yield to maturity of nearly 8.75, while a similar mauturity date for a Gilt, Treasury 4% 2009 currently yields about 5.10