Corporate Bonds

Archive for the ‘Corporate Bond Investing’ Category

Question: Can somebody please help me with this problem?

Sachi has $28,000 to invest. Her financial planner suggests that she diversify her investment into three investment categories. Treasury bills that yield 3% simple interest annually, municipal bonds that yield 5% simple interest annually, and Corporate Bonds that yield 9% simple interest annually. Sachi would like to earn $1360 per year in income. In addition, Sachi wants her investment in Treasury bills to be $8000 more than her investment in Corporate Bonds. How much should Sachi invest in each investement category?

Answer: Treasury bills:
Principal = p
Rate = 0.03
Interest = 0.03p

Municipal bonds:
Principal = 28000 - [(p + (p - 8000)] = 36000 - 2p
Rate = 0.05
Interest = 1800 - 0.10p

Corporate bonds:
Principal = p - 8000
Rate = 0.09
Interest = 0.09p - 720

The sum of the three interest amounts needs to equal $1360.

(0.03p) + (1800 - 0.10p) + (0.09p - 720) = 1360

---> 0.03p + 1800 - 0.10p + 0.09p - 720 = 1360

---> 0.02p + 1080 = 1360

---> 0.02p = 280

---> p = $14,000

Sasha invested:

$14,000 in Treasury bills (p)
$8,000 in Municipal bonds (36000 - 2p)
$6,000 in Corporate Bonds (p - 8000)

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Holt: The prospects for Corporate Bonds

Question: Corperate bond, what happends to your investment if the company is bought?

Lest just say you bought some Corporate Bonds because of the high Interest rate, and the company isn’t doing so well later on... what would happen to your bonds if the company is bought out by a bigger company or what if it went into bankruptcy

Answer: Its depend on the terms and conditions attached to the bond. Bond is nothing but a loan to the company, so you are the creditor of the company. The bond deed (or Constitution, articles, Instrument... depending on which country you come from) explains what will happen when the company is acquired by another company. As the company is bought by the other company as a going concern, the new investor will honour the loan, except when otherwise stated on the bond deed. Some bond required that the company must repay the bond holder once the company is acquired by someone. So read the bond deed to find out the answer.

If the company went into bankruptcy, the outcome depends on whether the bond is secured, priority or sub-ordinate or not. If it is a secured bond, the asset backing the bond will be sold and the bond holder will get money first, before any other person. If the bond is sub-ordinate bond, then the bond holder can only get their share of money after everyone is paid.

So , read the bond deed.

Bond Investing : When Is the Best Time to Buy Municipal Bonds?