Corporate Bonds

Archive for October, 2009

Question: The secrets of the clever Corporate Bond Investor?

I think I have a good enough understanding of what to be looking for in a corporate bond,..stable company, callable vs. non, terms, etc.
What I'd like to know is if there are clever timing strategies like in the stock market. Also, what do brokers tend to charge for the transactions compared to stock trading? Other tips, hints?
Thanks in advance.
Yes, the bond funds aren't too attractive.
I'm looking for conservative returns.. something that will be a step above money market fund returns of about 4.6%.

Answer: You are certainly correct in the fact that you have to be clever to buy bonds. They are a great deal more difficult to buy than stocks. There are a couple of reasons for this. One is that the market for bonds in general is not as liquid as for stocks. Some bonds are traded very infrequently. Secondly, the commission that is paid on the average bond is a lot more than one would pay on a stock. Brokers sell bonds generally by building the commission into the price of the bond so you do not know what the commission is.

To give you an example the current bid on JP Morgan Chase 4% due 2/1/08 is 99.722. The ask is 100.072. Or $3.50 per bond.

On actively traded bonds and if you are buying and selling large quantities you can get better pricing if you shop around, an arduous and time consuming process.

One trick is to put in a bid at a particular price as you would do on a limit order. Bond prices due tend to fluctuate based on supply and demand and since they are thinly traded the fluctuation can be significant, perhaps $20 per bond in one day.

A good timing strategy is to buy bonds when interest rates are high and sell them when they are low. Now is a good time to sell.

There are bond mutual funds that you can dabble in. Many are traded like stocks as closed end funds and they come in various varieties as long term bond funds, junk bond funds, foreign bond funds, and so on. The main disadvantages of the mutual funds is that there is an expense ratio and the yield is not locked in as they tend to contiually trade their bonds unlike an individual investor who might buy a bond and hold it until it is called or until maturity.

An example of one is Pimco Corporate Opportunity Fund--ticker PTY. Current yield is 10.3% about. Bonds are on average investment grade. Expense ratio is 1.38% rather high. Price history is 13.40 per share currently but has traded as high as 17 during the past year. YTD return is -11.37%. The current banking crisis has played havoc with bond funds.

Question: Which of the following statements is NOT CORRECT?

All else equal, secured debt is less risky than unsecured debt.
The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero.
All else equal, senior debt has less default risk than subordinated debt.
A company's bond rating is affected by its financial ratios and provisions in its indenture.
Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the Act.

Answer: They all seem pretty dodgy to me and I'm a lawyer.

Sparinvest High Yield Value Bonds update Q1 2010 - HD