Corporate Bonds

Archive for March, 2010

What are the benefits of Floating Rate Notes or floater?

Value in a Rising Interest Rate Environment

An investor who believes interest rates are on the rise may not want to commit to a current fixed rate for the long term investment.

Conversely, short term inertness rates may also not meet an investor's expectations.

Floating Rate Notes or floaters offer an ideal alternative as they generally pay a spread above current short term interest rates as well as offer the benefit of future increases in the benchmark.

If interest rates rise for example, the investor will receive a coupon payment higher then the original coupon.

Manage Interest Rate Risk

While a fixed rate corporate bond will trade down in price as interest rates rise, a floating rate bond tied to interest rates typically does not react as strongly to interest rate variations because the coupon changes in sync with interest rates.

As a result, Floating Rate Notes or floaters will not appreciate as much as fixed rate bonds in a declining interest rate environment, however, in a rising interest rate environment should out perform fixed rate Corporate Bonds.

Floating Rate Notes or floaters give investment variety

Floating Rate Notes or Floaters are available in a variety of maturities, issuers, credit quality and coupons. Therefore, they give investment variety for diversification.

Question: What kind of return do Corporate Bonds usually provide?

If I were to invest, say, $20,000 in Corporate Bonds what kind of return can i expect compared to government securities.
Also, what is the average amount of time that Corporate Bonds take to fully mature?
I'm looking for a somewhat shorter-term, higher risk, higher return type of investment. Do any of you seasoned investors have any great ideas or advice? I'm fairly young (22) so I can handle the risk and am able to recover from losses.
And i already have a Roth IRA, and a small long term investment portfolio, so please, no one tell me to save for retirement. I'm already on it.

Answer: You can get some corporate bond yields at the link below. Corporate Bonds usually take between five and 30 years to mature.

Commercial Paper is shorter term -- but is not high risk, and has lower yields.

Bonds come with a face value of $1000 -- and usually sell in lots of 100 bonds ($100,000 face value). Therefore, you would not be able to put together a well diversified portfolio unless you are able to invest several million dollars.

If you are looking for something with a regular income, I would suggest a high dividend stock or preferred stock. Interst on bonds is taxed at your ordinary income rate -- but income on dividends is taxed at 15%.

Why Do Corporate Bonds Yield More than Treasury Bonds?