Corporate bonds is one of the most trending forms of investment these days to make money.
Compared to investing or buying shares, buying corporate bonds on the contrary is considered to be more complicated.
Corporate bonds market or the debt market, being complicated has no place for amateurs.
Investing in corporate bonds is on a hot fuzz and people are showing greater interest to make money buying corporate bonds.
So, what’s this fuss on corporate bonds?
Corporate bond is an assurance of repaying back the original face value of the bond along with a fixed ROI within a decided period.
It can therefore be referred to as “I.O.U” or simply stated ‘I Owe You’ document.
On the contrary to stocks, traders trade corporate bonds in the confined worlds between an institution/insiders and experts.
Put it in other words, corporate bonds market are actually Institutional markets.
Hence, you got little or no chance for small players, amateurs etc.
Investing in corporate bonds is highly popular for its higher yield or returns.
Since, corporate bonds are complicated and requires expertise, you cannot play the role of an unsophisticated investor.
Therefore, no room for error; else you will put yourself into highly volatile and risky zone.
Now, let us glance into the different kinds of bonds.
Types of Bonds:
The different types of bonds we deal with are:
- US-government securities
- Mortgage-asset backed
- Foreign Bonds
- Corporate Bonds
Coming to corporate bonds, companies issue these bonds and mostly trade privately or sometimes, publicly.
Corporate bond rating entities such as Standard & Poor’s, Moody’s & Fitch assess the risk amount involved in each of the bonds issued.
Post evaluating the risk of a default or inability to repay, they deliver letters detailing the risk factor in these bonds.
Ratings & Risk Inherent to Corporate Bonds
Bonds come with different ratings and each of the rating signifies its risk proportion.
Bonds which are AAA rated come with the least risk factors and are the most reliable assuring you good returns.
B (BB) rated bonds or the bonds having below ratings than this come with greater risk factors and hence, not recommended.
Agencies evaluate the rating aspect of the bonds considering factors such as financial condition including stability, existing debt and finally, the potential of its growth.
A well-managed and diversified financial portfolio will always have short term, mid-term and long term corporate bonds with higher value.
This can assist you in amassing saving for retirement, expenses for college, vacation expenses or stack up contingency funds.
Long term corporate bonds can help you get higher returns; however, prior to investing ensure it has AAA rating.
Buy & Sell of Corporate Bonds
Specific corporate bonds are bought and sold on the OTC market or Over-the-Counter markets.
It offer higher liquidity or put it in other words, your ability to trade them easily for cash requirements.
If you are intending to keep your bond portfolios versatile and active, these bonds are very useful.
According to market research, the face value of OTC bonds are somewhere around $5000.
Investors can buy bonds from the OTC market; they can likewise buy the bond’s initial offering in its primary market.
You can buy these primary market bonds from brokers, banking institutions, traders or brokerage companies.
These sellers charge a commission for the facilitation of these bond sale.
This commission is a fee depending on the sale price percentage of the bonds.
The price of these bonds depends on the face value percentage, which is calculated on the figure of $100.
To make it simpler, let us assume that you buy a bond which is sold at 95; it signifies that you can buy it at 95% of the original face value.
Therefore, if it comes at a price of %10,000, it could cost you $9500.
If you want to make money investing in corporate bonds, make sure to check its face value and look out for long term maturity values.
Paying Corporate Bond Interest Charges:
Corporations pay the interest rates on corporate bonds semi-annually or every 6 months.
If you are looking for a reliable source of revenue, these semi-annual interest prices on AAA rated bonds are brilliant.
Corporate bonds which come with the least amount of risk will yield you lower returns.
On the other hand, corporate bonds which come with high risks can fetch you higher returns.
These bonds offer maximum and higher returns to attract lenders, however, they are not reliable and should be avoided.
When the bond prices go down substantially, the ROI goes up since the bond prices now are less whereas the ROI is still the same as the initial offer.
Similarly, when the prices of the bond goes high, your yield lessens.
It is important to note that long term bonds always offer higher yields since the future is unpredictable.
The financial stability and profit margins of an organization might not remain the same when it offered bonds initially.
Hence, the returns are higher because of this volatile scenario.
This is why, long term maturity bonds will yield you higher returns and ROI.
– Callable or Redeemable Corporate Bonds
Often times, you will hear something known as Callable or Redeemable corporate bonds.
A firm can redeem the callable or redeemable bond prior to the maturity date.
In this case, investors have a downside, since they lose the interest rates for the remaining years in that bond life.
Nevertheless, the bond investor gets a premium in cash by the company who calls up the bond.
Anyways, this scenario of redeemable bond seldom happens, unless a firm is at a risk of being default.
You can find bond prices listed on several famous papers such as Barron’s, The Wall Street Journal etc.
The bond prices you find over there are for the recent trades done, generally, for the previous day.
Therefore, you should take into consideration that market conditions might fluctuate drastically, so ‘look before you leap’.
On the contrary, to minimize risk of investing in corporate bonds, you can invest in index-pegged funds or professionally managed bond funds.
These are passive funds related to the average value of a collection of bonds, reducing your chances of risk.
It is absolutely true that a well-constructed investment portfolio should comprise of a percentage of different bonds having various maturities.
None can deny that all corporate bonds have their own set of risk due to market fluctuations, but high rated ones are best.
Corporate bonds with high ratings can yield you regular income over the bond life.
Now, if you are ready to make money buying individual corporate bonds, you should bring into consideration couple core factors.
Primary Market Corporate Bonds or Secondary?
There are couple different levels in the crucial market of corporate bonds.
The first one is primary market, which generally represents new bond issues.
When an organization takes the decision of selling bonds to raise capital, these bond issues come in the picture.
They negotiate with different investment bankers and corporate investors for placing the bond issues on the market.
The pricing of these newly issued bonds are easy to understand and is comparable to the IPO of the stocks.
Investors buying the new corporate bond issues pay similar price referred to as Offering prices.
Small time investors or amateurs are totally out of the game.
Buying primary market bonds is not easy and is similar to the difficulty of buying IPO prior to its trading initiation.
You have to have a contact in these large banking institutions or know somebody who is offering the sale.
Excellent source of contact in these bond offering institutions is of utter importance.
Secondary Market Corporate Bonds
Secondary market bonds are those bonds which you can trade after the bond’s initial offering.
Unlike primary market bonds, small time investors can trade here but, should be very alarming.
Traders trade with secondary market bonds on OTC markets on the contrary to primary bonds.
These trades are carried out on closed proprietary trading systems or over the phone.
If you want to get your hands on these corporate bonds, you have to trade through a brokerage firm.
It is to important to note down that the prices of these bonds are complicated and cumbersome to track down.
If you want to buy these bonds, do proper market research and ensure the prices are justified.
You should evaluate the recent trading prices so you know what the ‘spread’ or ‘mark-up’ of the bonds are.
‘Spread’ is actually the difference between the price a broker is buying the bond and selling it.
Opposite to the stock commissions, Spread prices are actually incorporated into the bond prices.
Therefore, you may never know how much the brokers are earning in profits for that specific corporate bonds.
Before buying the bonds, research the recent trading prices of the bond and then buy from the broker.
This will help you in an approx. evaluation on how much spread your broker is earning.
Role of Financial Industry Regulatory Authority
Credit to the Financial Industry Regulatory Authority, a private agency who came up with a unique solution.
Their TRACE system can help you look for the recent bond prices based on recent transactions so you are streamlined.
Unlike past times, things now have changed a lot and you can at least stay updated to approximate prices of the bonds.
Once you have calculated the spread you likely have to pay for your bond to the broker, your real labor starts.
See if the broker has the bond with him or he is committing you to buy the bond from the market.
Only deciding about the spread isn’t going to suffice.
Buying corporate bonds require optimum research and due diligence unlike the trading of shares.
Always listen to the advice of a trusted professional financial monitoring firm and never fall into any trap.
Is your corporate Bond Exchange Traded?
Due to the apparently never-ending series of market scams amidst bond brokers, many stories have hit the spotlight.
Their scams have exposed so much that in return the market is now transparent and easier to deal.
We can now understand and relate to how this corporate bonds market works unlike previous times.
With every passing day, bit by bit, the corporate bond market is starting to act like the regular stock market.
The bond market is no more a complicated market like the past and has come up with lots of opportunities.
These days, investors or traders trade corporate bonds on public exchange.
New York Stock Exchange apparently could fathom the loads of opportunities in the bond market and initiated NYSE bond system.
NYSE system was launched back in 2007, April, thereby, replacing the previous Automated Bond trading system.
Since then, the new bond system is much easier and apparently friendlier to smaller investors.
After the launch of NYSE bond system, the sale of corporate bonds is performing well and growing substantially.
They are adding up newer corporate bonds with other bonds on regular intervals.
However, the bonds in public exchanges are just a small percentage of the entire bond market.
According to stats, you can find only a mere amount of 15% of the entire bond market in the form or transparent trade at exchange.
Still a substantial amount of bonds are not traded transparently and needs to be monitored.
While it is true that bonds are wise investments, however, success in the corporate bond market does not come by easily.
Always prefer going for government back bonds if you don’t have an idea, but if you are ready, go for these lucrative corporate bonds.
Benefits of Buying Corporate Bonds:
There are several benefits of buying corporate bonds and with the growth potential, people are really inclined to it.
1. Attractive Returns:
Corporate organizations generally bring in higher returns compared to other maturity bonds or government bonds, CDs etc.
However, higher returns come up with higher risk factors.
2. Steady Income Flow:
You can have a steady flow of income, corporate bonds are the best fit.
Investors can earn steady and consistent income from their investments while keep their principals intact.
It is an excellent addition to your investment portfolio.
3. Safe Investment:
Corporate bonds come with a rating after evaluation of their financial stability, profit consistency and capability of repaying back.
Corporate bonds with high ratings AAA are risk free and safer investment forms.
Corporate bonds offer a chance of selecting from numerous sectors, structures as well as credit-quality attributes diversifying your investment goals.
If you happen to trade or sell your corporate bonds prior to the maturity, it can be done with ease.
This is because of the massive size as well as liquidity of the bond market.
Make Money Wisely:
Corporate bonds are a great way to make money, however, they do require perfect skills and thorough research.
If you want to buy corporate bonds, always make sure they have a higher rating and do not get carried away easily.
Investing in corporate bonds with higher risks may seem lucrative for returns, but are seriously risky.
If you have conducted your due diligence, then corporate bonds investment are a great addition to your investment portfolio.
Corporate bonds have a sea of opportunities, but the market is extremely volatile, so adopt proper strategies.
Corporate bonds are always the highest yield income security.
It can infact outpace inflation on a long run because of the yield contrast over Treasuries.
Due to the reason that these corporate bonds are taxable, you should assess your tax situation prior to investing.
Bonds which foreign corporations issue can be volatile because of political, economic or other regulatory risks.
Since you can run into risk for these unforeseen factors, you need to be very sure you are investing in the right bonds.
To face lesser risk, always ensure to diversify your bonds throughout distinct industrial sectors and bond issuers.
That being said, fixed rate coupons are the best bets since it remains stable throughout the bond life.
Never go for variable or floating rate bonds since they are highly volatile and can pose threat to your financial status.
You should take all these factors into consideration and once you are aware of these, go for it.
Investing in corporate bonds have always been lucrative and so it is.
Hence, when you know it all and do your part, invest in them and make money steadily.