CORPORATE BONDS & CORPORATE BOND FUNDS EXPLAINED

First we will look at corporate bonds and then their corresponding mutual funds.

I recently covered the bond funds and mentioned the types of bonds.

Basically corporate bonds are debt instruments by which both private and public corporations (referred to as the issuer) use to raise money to expand their businesses by borrowing money from the general public. They have a relatively long maturity period(at least a year). Their corresponding shorter term securities are called commercial paper. The insurance of the corporate bond is the credit worthiness of the company and sometimes the company’s physical assets.

BTW corporate bonds are riskier investments that government bonds since with the latter, the government will just increase taxes and print more money so pay bond holders- something that unfortunately corporations cannot do. Therefore to counteract this higher risk, investors are offered higher interest rates.

In the agreement the principal is to be returned at a predetermined date until which you will be getting interest payments from the issuer. This is one of the major differences between corporate bonds and stocks because even though and investor gets interest payments from the company, he does not have any ownership interest as in the case of a stockholder.

Another interesting feature of corporate bonds is that they have call provisions/call options that allow the investor to redeem get his money back before the maturity date.

In investing in these bonds, the major thing that you should look for is that if the company has enough money to repay and the fixed interest so in a sense you could say that you have become a bank to the corporation

Wikipedia says that there are other types of bonds called convertible bonds that allow investors to convert the bonds into equity

Finally, as they are traded in the markets, their prices fluctuate a lot more or less like stocks.

Of late, corporate bond yields have been very good unlike in the recent years and this is because of this recession, Banks were wary about lending money in volatile times and since the companies needed money the encouraged bond holders with attractive interest rates.

According to thisismoney.com (and coincidentally Benjamin graham- the intelligent investor) the main risk for bond investors is inflation. If central banks see as if the economy is slowing down faster than the rising prices, they tighten monetary policy and this leads to the interest rates of bonds rising and their price falling, making investors wish that they has kept away from them.

In light of the above, the corporate bond fund is a mutual fund that invests in these corporate bonds. They make it easier for a small investor to invest in the somewhat complex bond market. Since the fund manager wants to maximize returns he selects corporate bonds (investors have no control over selection) and sometimes the bonds are not held up to maturity. This therefore means that interest payments fluctuate. Also these funds have low volatility and this yet another reason that they are good for risk aversive individual investors.

The corporate bond funds were hit hard by the recession just like the lower rated bonds.

Finally this linked article that I have found shows that one must never get into an investing craze because of the masses by showing the major losses that investors suffered because of this misjudgment.

That is basically the corporate bond and their corresponding mutual funds. Any additions or corrections or whatever are welcome.