Anyone invest in corporate bonds?

[disneysteve]

In answering a question on another thread, I suggested investing in corporate bonds, something that I personally have never done. As I look at the offerings, though, I'm thinking more about adding some bonds to our portfolio. Do any of you invest in individual corporate bonds? What has your experience been with them? Anything I should know to watch out for?

[buildmybudget]

Have you been able to figure out an avenue for investing in these individually? I haven't really seen much investing in these other than institutional investing.

[disneysteve]

Have you been able to figure out an avenue for investing in these individually? I haven't really seen much investing in these other than institutional investing.

Scottrade lists tons of bonds available for purchase.

[Mr Nice Guy]

My personal finance teacher and a couple other sources have said do NOT put any money currently in bonds... using the concept of contrarian investing, maybe its a good idea? Usually when everyone says to invest in something, it already too late, right?

[disneysteve]

My personal finance teacher and a couple other sources have said do NOT put any money currently in bonds... using the concept of contrarian investing, maybe its a good idea? Usually when everyone says to invest in something, it already too late, right?

There are two reasons to invest in bonds essentially. One is to get a steady income stream. The other is with the hope of buying low and selling high since bond prices change usually based on interest rates.

If your goal is income, all you really care about is the yield and the stability of the issuer. Hold the bond until maturity and it really doesn't matter what happens to the bond's price.

If your goal is to earn money on the rising value of the bond, then you need to be concerned with the interest rate environment and economy.

Personally, I'd be investing for the interest income and would plan to hold the bonds until maturity so the other stuff wouldn't really matter, especially if they are non-callable bonds.

[Slug]

Ameritrade has tons of bonds available as well. As I noted in the other thread, I did buy 5 BP bonds selling at a tremendous discount during the media frenzy. It was a sensational buy that I'm unlikely to be able to replicate anytime soon. At present, yields are rather unattractive unless you're comparing them CD's. However, CD's are riskless, and bonds are NOT. I actually bought more MO yesterday instead of going the bond route. The dividend is still sensational and the business model is solid. I plan on selling some covered calls on the shares as well.

[disneysteve]

CD's are riskless, and bonds are NOT.

I understand your point, but is there really that much risk in buying, for example, a 5-year Microsoft or Wal-Mart bond if you intend to hold it to maturity? Sure, the value may fluctuate, but I don't see either of those companies defaulting on their debt between now and 2015.

[Slug]

I understand your point, but is there really that much risk in buying, for example, a 5-year Microsoft or Wal-Mart bond if you intend to hold it to maturity? Sure, the value may fluctuate, but I don't see either of those companies defaulting on their debt between now and 2015.

I'm not in disagreement with your thoughts on either of these companies. However, the thought of Bear Stearns and Lehman bonds are also on my mind. I'm sure plenty of people bought bonds in those companies in 2005 thinking neither of them would be defaulting either.

[disneysteve]

I'm not in disagreement with your thoughts on either of these companies. However, the thought of Bear Stearns and Lehman bonds are also on my mind. I'm sure plenty of people bought bonds in those companies in 2005 thinking neither of them would be defaulting either.

Yeah, that thought occurred to me, too.

I think if Microsoft, a company that currently sits on a bazillion dollars in cash goes under between now and 2015, the country will probably be in serious trouble.

[wincrasher]

That is why bond funds can be a good idea. You spread your risk and can be diversified across industries.

[disneysteve]

That is why bond funds can be a good idea. You spread your risk and can be diversified across industries.

The problem with bond funds, which I do own by the way, is that you then subject yourself to the interest rate risk and price fluctuation. There is no "maturity" for your fund shares. The fund is constantly buying and selling bonds. They keep the average maturity in a particular range depending on the fund but there is no defined beginning and end like there is with an individual bond. So you take on a lot more principal risk with a fund.

[wincrasher]

Well, I'd say the risk is dependent on the makeup of the fund. If the fund trades in many bonds, then your risk should be lower because your investment isn't dependent on the health of any individual company. Theoretically, a fund should also provide a higher rate of return as the "professional" managers can take advantage of market conditions and trade the bonds.

In our crazy economy, where even giants can fold overnight, I'd be alot more comfortable in a fund that has 20-30 different corporate bonds in it being professionally managed, rather than picking a few bonds on my own.

[disneysteve]

In our crazy economy, where even giants can fold overnight, I'd be alot more comfortable in a fund that has 20-30 different corporate bonds in it being professionally managed, rather than picking a few bonds on my own.

If you can't afford to diversify with individual bonds, I'd agree with you, which is exactly why my wife and I hold a fairly significant position in Vanguard Total Bond Market Index fund. We've reached a point, though, where I think we can now diversify with individual bonds so I'm thinking about adding some to our portfolio.

[Slug]

The problem with bond funds, which I do own by the way, is that you then subject yourself to the interest rate risk and price fluctuation. There is no "maturity" for your fund shares. The fund is constantly buying and selling bonds. They keep the average maturity in a particular range depending on the fund but there is no defined beginning and end like there is with an individual bond. So you take on a lot more principal risk with a fund.

This is a key point not to be missed. If the bond market tanks, so do your bond funds. If you own the bond itself though, it's irrelevant because you've locked in the terms. I also own bond funds, but I think it's a further act of diversification to pick up some individual bonds too.

[jaystone]

Please forgive my naievity, but if I purchase a bond that originally sold for $10 at a price of $5 and hold it to maturity, would I receive $10 or $5 at that time? Thanks.