The intent of this paper is to define what bonds are as a vehicle for investors including a detailed explanation of the basic terms associated with bonds, the different types of bonds available in the markets, bond ratings, and why investors might want to consider bond investing to have a more diversified portfolio. Finally, the paper will discuss the relationship between bonds and interest rates in determining bond valuations. Following the discussion there will be a brief summary of the main points explained throughout the paper.
Everyone in the investment world is constantly looking for ways to insulate themselves from the volatility surrounding the markets in terms of strategizing investments and diversification. Most investors look to the markets for common stock options and mutual funds with hesitancy to global volatility facing today’s financial markets. Another investment market option to considered, although not immune to outside volatility, is the bond market. Ross stated the bond market is larger in scope than the stock market (2011). A bond is an investment option wherein the investor loans money to large organizations such as corporations, state and local municipalities, the US government and governments abroad (Parker, 2014). The Securities and Exchange Commission (SEC) classify a bond as a debt instrument. The bond, also known as a debt security, is issued to the public (creditor) who holds the bond until they are repaid by the borrower in interest-only payments over a particular period (Ross, Westerfield and Jordan, 2011). At the end of the bond term and only then is the principal of the loan paid in full as a balloon payment. It is similar to an IOU held by the creditor until the borrower fulfills their pro...
... middle of paper ...
...reditor to a corporation is there are legal protections in place giving the bond invester first rights of payment before payment is received among stock owners in the same corporation.
References
Boundless. 2014. 26th January 2014. .
Investor Words. n.d. Web Finance, Inc. 26th January 2014. .
Moody's. 2014. Moody's Investors Service, Inc., Moody’s Analytics, Inc. 26th January 2014. .
Parker, Mike. 2014. Document. 26 January 2014. .
Ross, Stephen A, Randolph W Westerfield and Bradford D Jordan. Essentials of Corporate Finance. 7th. New York: McGraw-Hill/Irwin, 2011. Book.
Troy, PhD., Leo. Almanac of Business and Industrial Financial Ratios. 31st edt. (2000) (page 159) Paramus, NJ: Prentice Hall.
The high yield bond is a bond that features higher returns but with a lower credit rating than typical investment-grade bonds. These bonds can also be referred to as ‘junk bonds’ that are rated as below investment grade by organizations such as Moody’s and Standard and Poor’s. [Appendix #1] Generally, companies that issue high yield bonds may receive their rating due to a few characteristics, such as being less established than typical household brands, showing weak financial performance or they may have suffered a financial setback at some point in their corporate history. Although, high yield bonds may seem to have a relatively negative reputation among investors they possess many attractive advantages which include: diversifying portfolios, greater yields, lower volatility thus makings for a good long-term investment and the fact that bondholders have priority of recovering their money over equity security holders in the case of bankruptcy. These bonds are accessible to investors either as individual issues or through the means of high-yield mutual fund investments. On the other hand, there are certainly risks involved when investing in high yield bonds, such as credit risk where there is the possibility that the issuer defaults on the principal or interest payments over the course of the term and investment in these bonds ultimately depends on how informed the investor is and the amount of risk the investor is willing to tolerate. Similar to other types of securities there is always the threat of economic downturn and risks occurring when investing in international markets, such as political and exchange rate risks. In contrast, high yield bonds are able to mitigate interest rate risks better, and are less vulnerable to drast...
... Capital, Corporation Finance and the Theory of Investment", The American Economic Review, vol. 48, no. 3, pp. 261-297.
Organizations that decide to issue bonds generally go through a series of steps. Discuss the six steps.
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Companies.” Wall Street Journal, Eastern edition ed.: 1. Nov 26 1999. ProQuest. Web. 19 Apr. 2014.
Debt capital refers to money borrowed. Examples of this include bonds and short-term commercial paper. Bonds are more widely used because it provides a company with years to come up with the principal while paying interest only. Bonds are rated (i.e. AAA, AA, BB, etc.), these ratings correspond to the risk of default. The higher the rating, the lower likelihood of default and therefore a lower interest rate accepted by the lender. Short-term commercial paper is typically...
The execution of our investment strategy occurred in three stages. First, we invested in t-bills and bonds according to our original set out investment plan. This was to decrease potential losses and risk associated with the declining equity market. Therefore, we invested about two hundred thousand of our funds into these low risk assets to maintain buying power. Due to inflation, we did not want to lose buying power by leaving funds in an account without earning interest. Further, we invested a small portion of funds into the commodity market. With a slumping equity market and a positive outlook on the gold commodity, we invested in Gold Corporation at the same time we invested in income assets.
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
Keogh, Bryan. "The Trouble with Catastrophe Bonds." Www.businessweek.com. Bloomberg Businessweek Magazine, 21 Apr. 2011. Web. 27 Oct. 2013. .
According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio.
Financial Future: Where Will it be in 10 Years? Retrieved on November 20, 2013 from
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
I am currently majoring in Finance Management. Most of the time people think of finance as just managing money. However, finance is needed for so much more! The finance industry deals with starting businesses, developing new products, expanding markets, as well as everyday things like saving for retirement, purchasing a home, and even insurance. The stock market, asset allocation, portfolio analysis, and electronic commerce are all key aspects in finance. In this paper, I will explain how these features play a vital role in the industry, along with the issues that come with these factors.