- What are the benefits of corporate bonds?
- What are corporate bonds?
- What causes corporate bond prices to fluctuate?
- The main types of corporate bonds
- Convertible bonds
- Other kinds of bonds you may come across
- Stocks vs corporate bonds
- Historical returns from corporate bonds
- Corporate bond prices and yields
- How to calculate bond yields
- Bond default probabilities: by rating
- Does opportunity knock in the UK retail bond market?
- How to create your own DIY corporate bond portfolio
In normal times, corporate bonds are the also-rans of the asset class world. They’re sometimes sexed-up, such as in the 1980s when Wall Street raiders used junk bonds to fuel company takeovers. But usually they’re too boring to interest private investors.
Boring can be profitable, but only if the underlying risk/return case is good. In my personal view, that’s rarely true of corporate bonds. (Many financial advisors and writers think different).
Corporate bonds:
- Offer none of the income growth of equities
- Are still exposed to the risk of company failure
- Don’t adequately diversify the risk of holding equities
- Aren’t anything like as secure as government bonds (governments can print money to pay their debts)
- Yield only 0.5-1.5% more than government bonds (in normal times!)
An asset is an item of economic value that can be converted into cash.
Assets likely to be held by private investors include: cash in bank deposits, securities (such as shares issued by private companies, and government or corporate bonds), property, insurance policies, foreign currencies, cars, art and antiques.
Company assets include plants and machinery, and intellectual property.
Different assets have different characteristics. Variables include:
- Liquidity – how easily can the asset be converted into cash?
- Rate of return – does holding the asset generate a cash income? Gold bars don’t give you an annual income. Shares in a large-cap diversified mining company typically do.
- Potential for capital appreciation – stocks and property tend to rise in value over time. Cash does not.
- Volatility – how does the asset’s value fluctuate over a given time period?
An investor’s requirements regarding these different characteristics will determine which assets are most attractive to him or her.
See more financial terms in the Monevator glossary.
Back in March 2008, I asked if rising interest rates at Zopa, the British peer-to-peer lender, were an opportunity for cash-rich savers or an accident waiting to happen:
In the A*, 24-month market, I seem to be in the zone with an interest rate of 10.5%, which Zopa estimates will give me 9.5% after bad debt.
That 9.5% is almost 50% more interest than on the best savings accounts available from banks at the moment.
I’m gob-smacked.
My post generated a few comments around the web. Even Zopa joined the discussion on the Zopa blog:
Johnnie Moore pointed us towards Monevator and a recent post about Zopa, and we thought it contained some food for thought. […]
Our default rate remains at less than 0.1% and we’ve seen no evidence of increasing bad debt. With our state-of-the-art credit and affordability checks, we’re confident that our credit process will continue to perform well.
So, sit back, relax and have a really nice relaxing biscuit and tea filled weekend!
Zopa was right. Nearly 10 months on I’m yet to see any bad debt. I’ve had a few late-payers but so far Zopa’s credit control has proved impressive and they’ve all coughed up.
Reminder: Zopa is a peer-to-peer lending platform. Rather than saving money in a bank, you effectively become a bank yourself, spreading your money between other Zopa members who are borrowers and who pay you interest. Think eBay for savings.
The Annual Percentage Rate (APR) enables you to compare the costs of different loans.
Mandatory use of the APR was introduced in the UK in the Consumer Credit Act of 1974, which said that the APR must be the most prominent rate or charge published in marketing or other material for all regulated loans
APR is given as a percentage. This is the annual cost you will pay for your loan in percentage terms.
As well as the percentage rate, the lender must also give you details such as how long the period of repayments will last for, and often you will have to make payments.
In practice it may be more complicated because certain costs may or may not be included in the APR.
GDP – or Gross Domestic Product – is a measure of the overall economic output within a country’s borders over a particular time, typically a year.
GDP is calculated by adding together the total value of annual output of all that country’s goods and services.
GDP can also be measured by income by considering the factors producing the output – the capital and labour – or by expenditure by government, individuals, and business on that output.
- Real GDP is the gross domestic product adjusted for inflation
- Nominal GDP is the gross domestic product without taking into account inflation.
What is the GDP growth rate?
The change in GDP from one year to the next (or from quarter to quarter) can be given as a percentage. This is called the GDP growth rate.
The real GDP growth rate is a much more useful measure of economic growth than the nominal rate.
If a country’s GDP is growing at a nominal rate of 5% but inflation is running at 4%, only 1% of the growth is down to improved economic output. The rest is just because prices of goods and services went up.
What is GDP really worth?
The GDP shows how well a particular country is doing economically.
A recession, for instance, is defined as two quarters of negative GDP growth.
One drawback of GDP however is that it can only measure what the government has measured. Anything traded without the government knowing won’t be included in the GDP, which can be significant in some countries.
Also, it’s worth stressing GDP is a purely economic measure. A brutal dictatorship might whip a decent GDP growth rate out of its workforce, for instance, but it wouldn’t say much about the standard of living in that country!
Similarly, some environmentalists have argued that our obsession with growth has led to an over-exploitation of the Earth’s resources.
GDP as a formula
The GDP can be represented by the following formula:
- GDP = C + G + I + NX
Where:
- C = All private consumption
- G = All government spending
- I = Investment by businesses
- NX = The country’s net exports (total exports – total imports)
To discover what is the GDP of particular countries, try the CIA World Factbook.
