Cor­po­rate bonds part of a bal­anced port­fo­lio

South Shore Breaker - - Sports - KEVIN DOREY FI­NAN­CIAL FO­CUS kevin.dorey@ed­ward­jones.com

Stocks may grab all the head­lines, but they’re not the only way to in­vest in com­pa­nies.

Cor­po­rate bonds should also be part of a bal­anced port­fo­lio, yet they re­main over­looked by many Cana­dian in­vestors. Here’s a ba­sic primer to get you fa­mil­iar with this im­por­tant as­set class.

Cor­po­rate bonds are is­sued from com­pa­nies that are fa­mil­iar to most Cana­di­ans, such as Royal Bank of Canada, The Toron­toDo­min­ion Bank, Cana­dian Tire, Tran­scanada Pipe­lines, Gen­eral Elec­tric, Loblaw and Telus, just to name a few. Un­like stocks, bonds do not give in­vestors own­er­ship in­ter­est in the is­su­ing com­pany. In­stead, they are debt in­stru­ments that are con­sid­ered fi­nan­cial obli­ga­tions.

Each bond sold — and they are usu­ally is­sued in de­nom­i­na­tions of $1,000 — comes with a ma­tu­rity date. At ma­tu­rity, which can be any­where from a few years away to 30 years or more into the fu­ture, the com­pany is to re­im­burse the in­vestor for the sum pro­vided. In be­tween the date of pur­chase of the bond and its ma­tu­rity date, the in­vestor is typ­i­cally paid semi-an­nual in­ter­est, though in­ter­est pay­ments can also be made on an an­nual, quar­terly or monthly ba­sis. This steady stream of in­come can make cor­po­rate bonds an at­trac­tive fixed-in­come ve­hi­cle for ev­ery­day ex­penses.

A bond’s yield to ma­tu­rity is the ac­cu­mu­la­tion of that in­ter­est plus any profit (or loss) that is recorded on its mat­u­ra­tion date. Gen­er­ally speak­ing, the value of cor­po­rate bonds de­creases as in­ter­est rates in­crease, and vice versa.

All com­pa­nies that is­sue bonds are an­a­lyzed by rat­ings agen­cies, such as Stan­dard & Poor’s and DBRS. These agen­cies as­sign credit rat­ings, which are based on a com­pany’s fi­nan­cial strength, fu­ture prospects and past his­tory. For bonds to be known as “in­vest­ment grade,” they must be rated “BBB” or higher. If the rat­ing is lower than BBB-, they are con­sid­ered “non­in­vest­ment grade” — of­ten re­ferred to as “high yield” or “junk” bonds. These are riskier in­vest­ments be­cause the com­pany is deemed to have a more un­cer­tain abil­ity to re­pay the in­ter­est or prin­ci­pal on its debt obli­ga­tions.

It’s al­ways im­por­tant to care­fully as­sess the risks of cor­po­rate bonds. The ul­ti­mate risk re­lates to a com­pany go­ing out of busi­ness. If that were to hap­pen, you could lose your in­vest­ment. In ad­di­tion, risk comes with credit rat­ing changes.

If you buy a bond from a com­pany, and its credit rat­ings are down­graded, the value of your bond could de­crease be­cause in­vestors will ex­pect a higher level of com­pen­sa­tion for the greater risk. That’s why you should stick with in­vest­ment­grade qual­ity bonds from a vari- ety of is­suers in dif­fer­ent sec­tors. Di­ver­si­fi­ca­tion in own­ing more than one is­suer is im­por­tant.

Cor­po­rate bonds of­ten pro­vide higher rates than other fixed-in­come in­stru­ments such as gov­ern­ment or provin­cial bonds. But like gov­ern­ment bonds, cor­po­rate bonds of the same credit qual­ity with the long­est terms gen­er­ally of­fer the high­est rates, to com­pen­sate for in­creased un­cer­tainty over an ex­tended time.

Cor­po­rate bonds are also in­ter­est­ing be­cause they can have cer­tain fea­tures, such as the call fea­ture, which is the right of the com­pany to buy back the bonds prior to mat­u­ra­tion at par.

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For more de­tails on cor­po­rate bonds, speak to your fi­nan­cial ad­viser. A pro­fes­sional can help you choose the right cor­po­rate bonds for your port­fo­lio.

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