corporate bonds (bond, fund, credit, dividends)

[CUTIGERENGR]

Some of the yields on corporate bonds are 6% for company with AAA ratings. Any negatives for these fixed income products? I would like to hear about the pros and cons you have had with them. These would be part of a balance portfolio of stocks,bonds,cd,cash, etc.

[mathjak107]

Give us an example. I am not aware of any AAA that high. Last i saw they were between 3-4%

[celcius]

Likely confusing coupon rates with yield. The coupon may be 6% but the bonds are above par.

[CUTIGERENGR]

Excuse me. 4% yield. Celcius is correct.

[bale002]

Originally Posted by CUTIGERENGR

Excuse me. 4% yield. Celcius is correct.

The pros are AAA-rated and 4% yield, slightly higher than US government and a few other AAA-rated agency bonds with the same maturities, and they may be slightly less sensitive to fluctuations in interest rates. But the cons are in any case price drops in case of rising interest rates and the risk, even if slight, of default (credit risk/issuer risk).

Usually corporate bonds are of around 5YR maturity, so compared to even highly rated municipal bonds of the same maturity, corporates may offer higher yields, though not tax free and without insurance, and overall municipal default rates are lower than corporate default rates (despite Detroit whose insured bonds are still being serviced by the bond insurance companies).

At any rate, it is probably good to diversify also the fixed income portion of a diversified comprehensive portfolio, so there definitely could be a place for AAA corporate bonds at around 4%.


Another question is whether to buy individual corporate bonds or a corporate bond fund.

If you buy and hold to maturity individual corporate bonds, then you eliminate the interest rate risk (unless you have to sell unexpectedly before maturity), but run concentrated issuer risk. It also takes a lot of research and there may be high transaction costs, though regulators are working to make the corporate and municipal bond markets more transparent and efficient for small investors.

If you buy a corporate bond fund, you are highly exposed to interest rate sensitivity, though you greatly reduce your overall credit risk. However, though some may disagree, I wouldn't be too concerned about interest rate sensitivity either if your intention is long-term buy and hold as a core portion of the bond allocation of your overall portfolio and you are satisfied with the yield at your entry point, aware of the inflation and interest rate risks.

[mathjak107]

high quality bond funds will see their interest rates rise over time as older bonds are sold or mature as well as reinvested dividends buying higher yielding shares offsetting much of any nav drop over time.

having an individual bond that plunges in purchasing power in 15-30 years is no different than the hit the nav of a bond fund will take .

the bond fund has a rising interest rate over time if rates rise , an individual bond does not.
the effect in 15-30 years can be the same.

usually rising rates go hand in hand with rising inflation.

anyone who thinks holding an individual bond long term is a safer bet should read the emperor's new clothes again.