Humpty Dumpty (Corporate Bonds)

By Eric Peters, Fall 2017 IAC Student Intern

Corporate bonds, the king of them all,

Largest market, U.S. and all.

Fueling our companies,

Helping them grow,

Secured by their assets,

Supporting their growth.

 

First pay the principal, locked in for term,

Loaning your money, indebting their firm.

Coupons and interest,

You’ll get in return,

Getting the principal,

When it’s matured.

Protected in bankruptcy, unlike their stocks,

Higher priority, worth all the costs.

Safer than others,

But if you’re concerned,

Check their prospectus,

On EDGAR you’ll learn!

 

Short-term or longer, you’re locked in for sure,

The longer your term is, the higher return.

Coupons are funny,

Fixed, floating, or none!

Must pay the taxes,

The same for each one.

 

Safer than stocks, but still carry some risks,

Defaulting on credit and interest rate risk.

Consider your temperance,

And ratings of bonds,

Consider your balance,

Portfolio costs!

Learn More:

  • Bonds are debt obligations
    • When you buy corporate bonds, you are lending money to the issuing company
    • In return, you get the interest and eventually your principle
    • There is a default risk
  • Equity interests aren’t protected in bankruptcy à unsecured, low/last priority
  • Bond/debt interests have some bankruptcy protection à secured (to specific assets), higher priority
    • HOWEVER, that doesn’t mean they don’t carry risks à there are always default risks based on company’s creditworthiness
    • Think about how you would rank in priority in the event of bankruptcy
  • Corporate bonds make up one of the largest component of the US bond market, the largest securities market in the world
  • Bond money is used for certain company purposes (operating costs, dividends, etc.)
  • Either short term à less than 3 years OR long term à 4-10 years
    • Longer term = higher risk and returns
  • CHECK the credit rating to determine the safe-ness of your repayment
    • Investment grade vs. non-investment grade
  • Types of Risk Associated with Bonds:
    • Credit/default risk
    • Interest rate risk
    • Inflation risk
    • Liquidity risk
    • Call risk
      • Make sure to diversify risk in your portfolio
    • Interest payments = coupon payments
    • Interest rate= coupon rate
      • Fixed coupons vs. variable/floating (usually tied to an index, T-bonds, or other market statistics)
    • Zero-coupon bonds = no interest payments until maturity
      • Investors in zero-coupon bonds must generally pay taxes each year on the prorated share of interest before interest is actually paid at maturity
    • Check with the SEC’s website for a prospectus indicating the risks associated with the bonds à describes how the company will pay you back, the security, etc. à check EDGAR à also check periodic reports (10-k’s give you a snapshot of a company’s condition)

If you want to learn more about corporate bonds, check out the following websites:

https://www.investor.gov/introduction-investing/basics/investment-products/corporate-bonds

https://www.sec.gov/investor/alerts/ib_corporatebonds.pdf