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A corporate bond is a loan contracted by a Corporation. Instead of borrowing from their banker, the corporation contracts these loans through investors ready to take higher financial risks in returns of higher interests. The higher risk is associated to the fact that a bond carries no guarantees or collaterals from the Corporation. The investors must asset their risk by evaluating the financial strength of the Corporate borrower and the intended use of the proceeds of the loan. In summary, if all goes as planned, the investor gets an attractive return in exchange of accepting no guarantee from the borrower.
The most obvious risk is in the fact that it ins’t secured by collaterals. Consequently, if the borrower default on its debt obligations, the corporate bondholders have no rights and are left with only with what will result of a new negotiation of the loan by the corporation. It usually means a fraction of the capital initially invested. In summary, the bondholders assume credit risk even if they have no or only a little experience in assessing financial risk. Many investors will also overlook that they assume change in the credit risk. New projects, threats, opportunities will affect the credit of the corporation in the future. Just one example is when the management of the corporation sees the opportunity to acquire another enterprise. That transaction may significantly affect the debt ratio of the corporation, change the credit risk and the associated risk of the bonds you hold. Trying to resell them before maturity might force you to accept a lower amount to find a buyer. The second risk is, because there ins’t any collaterals, corporate bonds are subject to rate fluctuations if you try to resell them before the term of the loan. On a 10 years maturity bond, if the interest rate on the market rises during that period and exceed the interest you get from your bond, it is easy to understand that you will not find buyers ready to purchase it at par.
The variety of corporate bonds offers different risk levels, yields and payment schedules. These are:
Callable and putable
Fixed rate coupons
Variable and adjustable rate
Step up or down
When a corporation needs to raise additional capital to fund its operations, it can use two types of financing: equity financing and debt financing. An equity, or stock, is an ownership stake held by a shareholder in a corporation. A bond, on the other hand, is a debt security issued by the corporation. The bond's indenture contractually stipulates that the investor will be repaid his or her invested principal plus interest. In other words, the investor is loaning money to a corporation. While corporate bonds have a predictable cash flow and are a more stable investment than stocks, they do not have the long-term capital growth potential of stocks. This is one of the trade-offs that you will need to explain when you speak with your customers about their investment goals, financial needs and risk tolerance.
What are Corporate Bonds?
A corporate bond is a contract between a corporation and the investor, whereby the investor lends the corporation money, in return for a legal promise that the corporation will pay the principal back to the investor on a specified date, with interest. The terms of the legal agreement between the investor and the corporation are spelled out in the bond's indenture (also called the "deed of trust") on the bond certificate. It will specify how and when the principal will be repaid, the rate of interest (also called the coupon), a description of property secured as collateral against default, and steps that shall be taken in the event of default.
Like any other debt, corporate debt can be either secured or unsecured:
Unsecured Debt: Unsecured bonds, also known as debentures, are secured only by the corporation's good faith and credit, and not by a specific asset. If the company defaults, the bondholders will have the same claim on the company's assets as any other general creditor. Though secured bondholders will be paid before debenture holders, owners of stock will be paid after unsecured bondholders.
When investors buy a bond, they are lending money to the entity that issues the bond. The bond is a promise to repay the face value of the bond (the amount loaned) with an additional specified interest rate within a specified period of time. The bond, therefore, may be called an "I.O.U."
Accredited Investors hypothetical (Corporate Bond) performance interest rates
Investors considering fixed-income securities might want to research corporate bonds, which some have described as the last safe investment. As the yields of many fixed-income securities declined after the financial crisis, the interest rates paid by corporate bonds made them more appealing. Corporate bonds have their own unique advantages and disadvantages.
One major draw of corporate bonds is their strong returns. Yields on some government bonds have repeatedly plunged to new record lows. The U.S. government sold $12 billion worth of 30-year Treasury bonds for a 2.172% yield on July 13, 2016, breaking the previous record of 2.43% set in January 2015. The yields on German 10-year bonds also ventured into record-low territory, selling with a yield of negative 0.05%.
Source Sited: Investopedia
In contrast to these record lows, corporate bonds representing high-quality companies and maturing in seven to 10 years paid 3.14% yields on July 14, 2016. One year earlier, these securities were paying a yield of 3.92%.
IMPORTANT: The projections or other information generated by MKG Financial Group Holdings Inc and its subsidiaries regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The guidance is educational in nature, is not fully individualized, and is not intended to serve as the primary or sole basis for your investment or private placement offering decisions.
The return assumptions are not reflective of any specific product, and do not include any fees or expenses that may be incurred by investing in specific products. The actual returns of a specific product may be more or less than the returns used. It is not possible to directly invest in an fund. Financial forecasts, rates of return, risk, inflation, and other assumptions may be used as the basis for illustrations. They should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment. Results may vary with each use and over time.
The Bottom Line
Like stocks, investing in corporate bonds requires informed decisions. Finding out the ratings and reading the financial statements of companies will lead to a more confident choice. If you decide on Treasury securities, make sure you are comfortable with the return and term of your investment decision. Especially in times of high levels of stock market insecurity, it is wise to build a stronger and more stable portfolio with a variety of bonds.
A few highlights from the US Private Equity Index in Q2 2017: •US PE investors received fifth highest quarterly distribution amount ever in Q2 2017. During Q2 2017, distributions to investors in the US Private Equity Index equaled $40.1 billion, a 23.2% increase from Q1 and the fifth highest quarterly distribution ever.
Fund managers in the Index called $24.5 billion, up 5.4% from Q1. •Only sector in US PE Index with negative returns in Q2 2017 was energy. Of the seven sectors each worth 5% of the US Private Equity Index in Q2 2017, materials companies posted the strongest return: 7.3%.
Energy investments were the only sector that went down in value, with a -1.1% return. •Not much variance in Q2 2017 between returns from funds of different vintage in US PE Index.Returns among the “meaningfully sized” vintages in the US Private Equity Index – that is, funds that each represented at least 5% of the index’s value – were within a fairly tight band, ranging from 2.6% for funds raised in 2012 to 4.0% for funds raised in 2014. Selected takeaways from the US
Venture Capital Index in Q1 2017: •Distributions to US VC investors were higher than contributions in Q2 2017. Distributions to investors in the US Venture Capital Index totaled $4.5 billion in Q2 2017, a decrease of 12.9% from the previous quarter. Capital called by fund managers in the Index rose 13.8% from Q1, to $4.2 billion.
All major sectors in US VC Index posted positive returns in Q2 2017. Among the three industry sectors each worth at least 5% of the US Venture Capital Index in Q2 2017, the highest return for the quarter was from health care investments, which posted a 1.9% return. Information technology investments and consumer discretionary investments rose in value by 1.5% and 1.4%, respectively.
Sources: Cambridge Associates LLC, Frank Russell Company, Standard & Poor’s and Thomson Reuters Datastream.