Candlestick Trading Blog
June 20, 2008
Corporate Bonds
What are Corporate Bonds? Corporate bonds are bonds issued by major corporations and can be divided into five major groups. These groups include utilities, banks and other finance companies, industrials, transportations, and international. These bonds are often listed on major stock exchanges however most of the trading volume takes place on over the counter markets. Sometimes corporate bonds include all bonds except those issued by the government however technically speaking they must be issued by a corporation to qualify. When compared to government bonds, they also are considered to generally have a higher risk of default, and as a result, receive a higher yield than government bonds. Corporate bonds contain a provision known as the “poison pill provision” which is a risk prevention measure that a corporation can make in the event they may be acquired by another company. What it does is it allows its shareholders to buy stock of the acquiring company or more of the same stock at a heavily discounted price. This protects the corporation because lowering the stock and providing it to the shareholders would have a negative impact on the acquirer and would therefore reduce their interest in purchasing the company. This prevention measure typically sets the investor’s mind at ease because it is nearly impossible to predict dramatic changes in a company. Other measures taken by corporations to decrease investor uncertainty when investing in bonds include putable bonds and floating rate notes. Putable bonds are designed to protect bonds against interest rate fluctuations and floating rate bonds also help to protect investors against interest rate risks while keeping the value closer to par. There are many benefits to investing in corporate bonds as well. They provide attractive yields as discussed above in comparison to government bonds or CD’s. They offer diversity to investors looking to build a strong portfolio, and they provide a dependable income by providing a steady income. This is a very attractive feature to those looking to preserve their principal for their investment portfolios. Another benefit of corporate bonds is that they are safe and marketable. You can pretty easily sell a bond before maturity due to the liquidity and size of the market, and they are evaluated and assigned a rating based on the corporation’s ability to repay obligations and their credit history. If you are in the market for corporate bonds and would like to purchase one in order to achieve greater portfolio diversification, please keep a few things in mind. You must find out how liquid the bond is, and if the bond is listed on an exchange or over the counter. You also need to know the credit history of the corporation, and if there is a callable option fixed into the bond. You should also find out if there is a putable or floating rate option as discussed above. Bonds are a great way to invest money in the long-term and are typically less risky when compared to other forms of investing, such as stock options trading, or other methods that are considered more short-term. Just be sure that with any type of investing that you do your homework! Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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