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It seems not to make sense for individuals to hold a mix of stocks and bonds and at the same time companies carry debt at higher interest rates than treasury bonds. In other words, if I own both stocks of companies paying 6% interest on their debt and also own T-bonds paying 2%, I am throwing money away on the spread in interest rates, yet almost every financial advisor out there seems to think it wise to hold both stocks and bonds.
Wouldn't it make more sense to just have 100% stocks in companies that have no debt at all, instead of lending money at low rates and then owning an entity which borrows my own money back from the bank at a higher rate? Doesn't this amount to paying a middle-man for a service you don't even need?
Same thing with rental property and REITs. If you are going to hold bonds, why have mortgages on any real estate?
I am beginning to suspect that the common advice to hold bonds, combined with the taboo against investments holding assets outright without any debt, is just something the middle class is fooled into doing in order to spend their entire lives doing something they don't like, so that the rich bankers can have yet another 250-foot yacht without having to work for it.
Back in the days when leveraged buyouts were occurring daily (RJR Nabisco, various others) many companies took on debt to make themselves less attractive takeover targets.
As was mentioned, debt makes the business go in many cases. Borrowing for capital projects being one good thing.
Also, stockholders would go nuts if profits were plowed back into the company instead of distributed as dividends.
Sooooo many companies are borrowing at low cost rates and buying back their own stock.
Many companies made more money through stock price increases from buy backs then they did their core business.
This in the last few years. Lots of debt-fueled buybacks which have for the most part worked out very well.
In addition, companies like to debt finance because of the tax advantage. You don't pay corporate taxes on interest but you do on profits which can be returned to shareholders so it's a lot more tax-efficient to capitalize a corporation through debt than through equity -- and for all that I and most other retail investors tend to prefer stocks, high-yield corporate debt is popular for a reason -- the historical returns have been pretty close to those of stocks with less micro risks (although you trade that for the macro risk of inflation on the longer term equities with better yields). Very popular with institutional investors, especially those which are offsetting their own liabilities like for example pension funds.
This in the last few years. Lots of debt-fueled buybacks which have for the most part worked out very well.
In addition, companies like to debt finance because of the tax advantage. You don't pay corporate taxes on interest but you do on profits which can be returned to shareholders so it's a lot more tax-efficient to capitalize a corporation through debt than through equity -- and for all that I and most other retail investors tend to prefer stocks, high-yield corporate debt is popular for a reason -- the historical returns have been pretty close to those of stocks with less micro risks (although you trade that for the macro risk of inflation on the longer term equities with better yields). Very popular with institutional investors, especially those which are offsetting their own liabilities like for example pension funds.
You can only justify so much of a difference in interest rates for tax reasons though, right? If a pension fund has some money invested in corporate bonds, some in treasury bonds, and some in common stock, isn't it still a waste? If a company owned by the pension fund is paying 6% interest on its debt and the pension fund also holds treasury securities paying 2% interest, the "tax advantage" of debt capital is FAR too small to make up for this rate gap. The pension fund would still be better off if it owned ZERO treasury bonds, but its corporate holdings had paid off all their debt. What am I missing here?
You can only justify so much of a difference in interest rates for tax reasons though, right? If a pension fund has some money invested in corporate bonds, some in treasury bonds, and some in common stock, isn't it still a waste? If a company owned by the pension fund is paying 6% interest on its debt and the pension fund also holds treasury securities paying 2% interest, the "tax advantage" of debt capital is FAR too small to make up for this rate gap. The pension fund would still be better off if it owned ZERO treasury bonds, but its corporate holdings had paid off all their debt. What am I missing here?
You do understand that different asset classes have various returns and risk overtime right? You do also know within the fixed income market treasuries, corp debt, muni debt or high yield are react differently to various market influences.
What does a pension's investment have to do with a company taking on debt for funding operations or capital investments?
Because our government is in the control of the FIRE sector. The interest is tax deductible so its much better to finance with credit than to finance with equity.Only problem is tax revenue goes down and bankster profit goes up. So then they increase taxes on industry.
You can only justify so much of a difference in interest rates for tax reasons though, right? If a pension fund has some money invested in corporate bonds, some in treasury bonds, and some in common stock, isn't it still a waste? If a company owned by the pension fund is paying 6% interest on its debt and the pension fund also holds treasury securities paying 2% interest, the "tax advantage" of debt capital is FAR too small to make up for this rate gap. The pension fund would still be better off if it owned ZERO treasury bonds, but its corporate holdings had paid off all their debt. What am I missing here?
Companies sometimes want to keep a price relationship with the bond market. It's one thing to speculate on what you can borrow at, another to actually do an issue and see what it prices at and then what it trades at. Companies with no real need for the funds will do small issues, sometimes for capital structure reasons, sometimes to get a price so if they did a big issue to say finance a transaction they would have some pricing information, and sometimes just for the market information it gives them. Stocks are not always the best indicator, but the bond market has a very narrow focus and some management teams value the bond markets view of their business.
Companies sometimes want to keep a price relationship with the bond market. It's one thing to speculate on what you can borrow at, another to actually do an issue and see what it prices at and then what it trades at. Companies with no real need for the funds will do small issues, sometimes for capital structure reasons, sometimes to get a price so if they did a big issue to say finance a transaction they would have some pricing information, and sometimes just for the market information it gives them. Stocks are not always the best indicator, but the bond market has a very narrow focus and some management teams value the bond markets view of their business.
Thanks - this explains a lot. Now I understand!
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