how to buy corporate bonds

Bonds that are not call protected typically offer the benefit of higher yields in the immediate term but there is the risk that the issuer will call or redeem the bonds if the market interest rates fall.
Under the falling rate scenario, call protected issues cannot be redeemed before the stated maturity date and thereby shield the investor from interest rate risk, assuming the bonds are held until maturity.
What are the risks? Interest rate risk Prices are vulnerable to changes in interest rates; if rates rise, the market price of issued corporate notes will generally decline.
Corporate bonds offer little protection against inflation because the interest payments are usually a fixed amount until maturity.
Corporate bonds are also highly useful for tax-deferred retirement savings accounts, which allow you to avoid taxes on the semiannual interest payments.
Many corporate bonds offer a higher rate of return than government bonds, for only slightly more risk.
Corporate bonds offer a slightly higher yield because they carry a higher default risk than government bonds.
Corporate bonds are not the greatest for capital appreciation, but they do offer an excellent source of income, especially for retirees.
Corporate bonds can be bought through a full service or discount broker, a commercial bank or other financial intermediaries.
With Bond Store, you have at your finger tips an easy to use search engine that enables individual investors to search more than 30,000 bonds, including: U.S. Treasury bills, notes and bonds, TIPS and strips, U.S. agency securities, investment grade U.S. corporate bonds, municipal bonds and new bond issues.
Investment products and services offered through Zions Direct, member of FINRA/SIPC, a non-bank subsidiary of Zions Bank are (1) NOT insured by the FDIC or any federal or state governmental agency, are (2) NOT deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and (3) MAY be subject to investment risks, including the possible loss of principal value or amount invested.
With the Bond Store, individual investors buy bonds at the same price brokers buy from bond dealers or other brokers – the institutional price.
Fixed-income investments are subject to various risks including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.
If you’re shopping for bonds to round out your asset allocation, corporates involve more risk than munis or Treasuries – but that increased risk is usually counterbalanced by a higher interest rate.
You’ll need to monitor your corporate bond investments closely, on an ongoing basis, as interest rates and the market environment changes.
But if the Fed were to bump up interest rates to a rate higher than your bond’s coupon, your bond won’t look so hot compared to new bonds issued with the higher coupon rate.
Corporate bonds involve more risk for several reasons; chief among them are event risk, credit risk, default risk and call risk.
Increased time-to-maturity, higher coupons, longer duration, illiquidity and bonds trading at a discount are all additional factors which can increase the volatility of bond prices.
Some investors gradually shift from higher-risk investments like stocks to high-quality, investment-grade corporate bonds as the time horizon for a given financial goal approaches.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.
Laddering is a bond strategy that spreads your risk over a series of different maturities, while maintaining an average maturity that suits your investment goal’s time horizon.
Lesson 10: How to Choose a Corporate Bond for Income – We recommend that most investors who buy individual bonds should hold them until maturity.
Lesson 7: What Happens When a Corporate Bond Defaults – If you are holding a bond and it defaults that doesn’t necessarily mean that you are not going to get a large portion of your money back.
Lesson 2: Using Credit Spreads to Determine Relative Valuation – Corporate bond credit spreads fluctuate based on economic conditions and other factors.
Lesson 5: How to Use Corporate Bond Credit Ratings in Your Investment Decisions – Many investors understand that a bond with a B rating has more credit risk than a bond with an A rating.
Lesson 11: How to Buy a Corporate Bond – Once you have found the bond you want to buy, you’ll need to understand how to place an electronic bond trade, which is the topic of this lesson.
Lesson 1: Why Buying Bonds is not Like Buying Stocks – Unlike the stock market the bond market is an over the counter market.
Lesson 9: Where to Find Corporate Bond Prices – There are several places that provide free delayed bond prices.
Lesson 8: How Read a Bond Quote Like A Professional Bond Trader – Before placing your first bond trade you will obviously need to know how to read a bond quote.
If you have a question about buying corporate bonds along the way, feel free to leave a comment at the bottom of the lesson itself, or in our ask a question forum which you can find here.
Lesson 3: Bond Covenants – What They Are, Why They Are Important, and How to Use Them – How the terms and conditions of a bond are structured has a significant impact on the value of the bond.
To quickly figure how much money you are really going to earn when you buy a corporate bond look for the acronym (YTM).  The YTM tells you how much interest or yield you’ll receive from the time you buy the bond to the time it matures.  If you’re paying a premium for the bond, the rate at which the bond was issues (called the coupon rate) will be very different from the Yield-to-Maturity.  Let me explain, your bond search may find companies paying 5, 6, even 7 percent with maturities of two years of less.  But once you add in the premium, you’ll see those yields fall to 1.5% to 2.5% depending on the credit rating.  Again the lower the credit rating, the higher the yield you’ll receive.  On a regular basis I have a client or someone call and say their friend just picked up a bond paying 5% with a short maturity and they want some too.  So I usually have to walk them, and their friend, through YTM and how it works.
Corporate bonds typically trade at three price levels:  At a premium, a discount, or at par value.  Without going into too much detail, most bond buyers today have to pay a premium because we are in such a low interest rate market.  For example, there are bonds that mature in less than a year and have a coupon (yield) of 5%.  The trouble is, instead of paying $100 per bond, investors have to pay more for that rate.  That’s important because if you pay a premium, it reduces the income or yield you’ll receive from it since that portion won’t be included in the principal that is given back to you when the bond matures.
Fortunately, it’s become a lot easier over the years to buy bonds on your own.  Finding and selecting your first individual bond, such as a corporate bond, is a lot like doing a new home search on the Internet.  When you start a property search, you’re asked questions such as which city you want to live in, minimum and maximum you want to spend, how many bedrooms and bathrooms, etc.  You’ll find a similar format for purchasing individual bonds, including the option to keep your search as broad or as detailed as you like.  I suggest new bond investors begin their search focused on four key components.
Many investors have bought a stock or bond mutual fund as part of an employer’s retirement plan or their IRA.  Several have also bought their own individual stocks, but few have ventured into the area of individual bonds.  Individual bond investing is an area that’s becoming more popular among retirees and conservative investors who fear investing too much in bond funds (where they can actually lose principal in a rising interest rate market) and don’t want to lock their money up for an extended period in an annuity.
Finally, a bond’s maturity date is when the company will return your principal to you.  Typically, near the maturity date you will also find the bonds interest payments frequency.   The most common format is semi-annually (or two payment s per year).  Knowing the maturity date and payment frequency are important because investors may not want to extend the time they hold a bond beyond a certain point and you definitely don’t want to find out the bond your holding pays annually when you’re expecting a semi-annual payment.
When it comes to credit ratings, corporate bonds are classified into two distinct categories:  Investment grade or Junk bonds.  The division between the two comes at the BBB level.    Everything from BBB and above is considered investment grade, while anything BB and below is considered junk.    I suggest new investors stay within investment grade or venture no lower than BB.  You may be surprised to find some popular dividend paying companies in the BB range that you may already own in your IRA or through a mutual fund in your 401(k).  Either way, just as you diversify your stock investments, be sure to diversify your individual bonds as well, particularly in you go below investment grade.
The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy.
If you call your local branch office for assistance selling bonds, please be ready to provide your bond’s description, size and CUSIP number.You will also need to specify whether you want a firm quote from a bond dealer or are just looking for an indication of current value.If you request "firm" bids and agree to enter the selling process, you must be available to accept or reject the bids on your bond and will need to provide your branch manager with a phone number where you can be reached throughout the day.
For more information about corporate bonds or agency bonds, please visit the Investment Education section of Scottrade’s Knowledge Center.
Your bond order may be purchased for more or less than the original price you invested; the amount received will depend on the current market conditions.Orders to sell are handled on a best effort basis and we will make every effort to find the best price available for your bond.In some circumstances, there may not be a dealer that wishes to purchase your bond.Please review the BID/OFFER WANTED procedure for specific format requirements.
If you have questions or comments please contact Morningstar.
This raises the question of why so many investors buy individual bonds rather than putting their money into bond funds.
One major reason is that brokers push individual bonds, telling clients that mutual funds are for small investors, not for them.
And as long as they hold their bonds to maturity, they’ll get their entire principal back — except in the unlikely event that a bond issuer defaults.
One of my favorite funds, Metropolitan West Unconstrained Bond M (symbol MWCRX), should lose little or nothing when rates rise because it’s deploying some of its assets to sell Treasuries short — that is, betting that they will fall in price.
You can sell at an outrageously low price or cross your fingers, hold the bonds until they mature and hope that inflation hasn’t eroded their value substantially.
No professional wants to buy the relatively small bond pieces that individual investors own, so no one offers remotely fair prices.
In truth, holders of individual bonds aren’t exactly complaining — or breaking down brokers’ doors to unload their holdings.
In terms of total face value of bonds outstanding, the corporate bond market is bigger than each of the markets for municipal bonds, U.S. treasury securities, and government agencies securities.
You can get real-time price information on corporate bonds you own or may be considering for purchase as well as news affecting the corporate bond market on the “Corporate Bond Market At a Glance” page.
Investors in corporate bonds have a wide range of choices when it comes to bond structures, coupon rates, maturity dates, credit quality and industry exposure.
Corporate bonds are debts issued by industrial, financial and service companies to finance capital investment and operating cash flow.
Demand helped propel investment-grade securities to a 3 percent return in the first quarter, the best start to a year in a decade, and upending Wall Street predictions for below-average gains, according to Bank of America Merrill Lynch index data.
Yields on high-yield, high-risk bonds in the U.S. have dropped to 6.1 percent, just 0.11 percentage point from the all-time low reached last May, according to Bank of America Merrill Lynch index data.
Ironically, it’s harder than ever to find securities for sale even though the U.S. corporate-debt market has grown 53 percent since 2008, with companies selling $6.9 trillion of notes since then, according to data compiled by the Securities Industry and Financial Markets Association and Bloomberg.
Buyers have gobbled up about $415 billion of new corporate bonds in the first three months of the year, the third-biggest quarter ever, according to data compiled by Bloomberg.
The reinvigorated race for company bonds comes on the heels of a 10.8 percent average annual gain on the notes since 2008, Bank of America Merrill Lynch index data show.
Fixed interest funds don’t have fixed maturity dates like individual corporate bonds, government bonds and gilts, and they can go up and down in value.
The manager invests in anything between 70 to 200 different bonds or gilts and aims to strike a balance that maintains an average price for the bonds held and a targeted average yield (the annual rate of return).
By investing in multiple corporate bonds within a fund, you are able to spread risk without relying on just one company.
It is placed in a broad range of gilts or bonds, run by an expert fixed interest fund manager.
You can expect to pay an annual charge of around 1.2% for investing through a corporate bond or gilt fund, or much lower if you choose a corporate bond or gilt tracker fund.
You can buy corporate bonds from the London Stock Exchange’s Retail Bond Platform.
Some smaller companies may offer corporate bonds paying much larger returns, sometimes nicknamed ‘junk bonds’, this return has to be higher due to the heightened risk of going bust – so investors should be cautious as to which companies they feel are stable enough to pay out.
These ‘retail bonds’ are specifically targeted at small investors and are separate from the far larger corporate bond market dominated by institutions.
A bond fund manager aims to take advantage of swings in the markets and deliver a return based both on the income from the bonds held in the fund and the extra boost from buying traded bonds below par, or selling them above par.
If you buy a corporate bond second-hand, you will get the right to be repaid its value at maturity and its coupon interest rate until then, but paying above or below par for the bond itself will change the income return.
The problem with a corporate bond fund is that its value depends on its varied holdings and dealings and can be affected by the market’s view on what will happen to interest rates.
For example, the Tesco Personal Finance bonds paying 5.2 per cent to August 2018 launched in February 2011 at £100, it currently trades at £105, so an investor selling out now would have seen a 5 per cent capital gain alongside the interest they have been paid.
A new route to investing direct in companies has opened up in recent years from the retail bond market as well as the more risky mini bonds.
The London Stock Exchange launched a retail bond market In February 2010 called the Order Book for Retail bonds, known as Orb.
Crucially, this means that your bond is only as safe as the company issuing it – something reflected in smaller, more risky firms having to offer higher rates to tempt investors.
Investors should bear in mind that it can be harder to judge the risk involved in investing in some company bonds than in others – it is easier to assess the likelihood of Tesco going bust than smaller and more specialist businesses.
By comparison if you just buy a corporate bond from one individual firm you are putting all your eggs in one basket and not spreading risk, but you will also know that if you hold it to maturity (and the firm doesn’t go bust) you will get your money back.
With interest rates at historic lows and saving accounts at low unappealing rates, sticking cash in a company bond can be seen as a solid investment.
The downside is that if interest rates are nearer the level of return paid by the bond, its price will fall and you will get less of your capital back if you sell out early.
Likewise, if the manager makes a bad call on buying bonds in companies that fold, or if his view that a certain company’s below par bonds will bounce back is wrong, the fund can lose money.
The key difference in flexibility between a corporate bond and fixed rate savings is that during its lifetime a market-traded corporate bond can be bought and sold and its price will change according to the market.
Corporate bonds are popular among investors, typically offering lower risk and higher income than shares.
Mini-bonds are unlisted products, meaning they cannot be traded and are not to be confused with retail bonds, corporate bonds and Gilts which can be bought and sold on the London Stock Exchange.
The minimum investment for these types of bond starts at a low level – sometimes as little as £100 but more usually from £1,000 – and companies use the money raised to grow or to fund their activities, or reduce their reliance on bank borrowing.
Consider whether to spread your risk by buying a bond fund, rather than tying up your money with just one company.
On the flipside, a good bond fund could rise in value thanks to some nifty trading and deliver a solid income return and capital growth.
At Fidelity, Schwab, and E-TRADE, you can buy Treasurys online for no commission and most other types of bonds, including agencies and corporate bonds, for $1 per bond.
A bond ETF is ideal for investors who primarily buy stocks but want to add bonds to their portfolio and keep fees down.
But remember that the stock-trading commissions don’t apply, and the bond commission can vary wildly depending on the broker and what kind of bond you’re buying.
Nothing is illegal about mark-up fees, and they’ve been a common way for brokers to charge commissions for buying bonds.
Buying from a mainstream online broker: Several of the bigger online brokerage firms (including Charles Schwab, E*TRADE, Fidelity, TD AMERITRADE, and Scottrade) also let you buy and sell bonds.
Just pick the bond ETF you want and buy it through your online broker just as you’d buy a stock.
Bond exchange-traded funds (ETFs): Another option for buying bonds is through exchange-traded funds.
Buying via a bond mutual fund: Buying individual bonds can be somewhat complex.
When prices are rising, both bond and stock investors pay attention because that affects the value of their investments.
Buying a bond ETF is the bond version of investing in a stock index like the Standard & Poor’s 500.
These ETFs track bond indexes, such as the Barclays Aggregate Bond index, which tracks a broad basket of bonds.
The percentage of ownership of stocks relative to what has been borrowed (typically 30 percent or higher at most firms) most online brokers require investors to maintain.
This means it has a yield to maturity of 6.67%. This link goes to the Morningstar description of these bonds.
For those who don’t want to select the bonds themselves, the SPDR Barclays Capital Intermediate Term Corporate Bond (NYSEARCA:ITR) ETF may provide an adequate substitute.
It trades at 104.0% of par; and it has a yield to maturity of 4.12%. The following link goes to the Morningstar description of these bonds.
If interest rates rise, there should still be appreciation as the bonds near maturity; and the bonds sold will be replaced by longer-dated bonds with higher interest rates.
This is non-callable; and it has a yield to maturity of 7.46%. This could turn out to be a good investment; and unless you think the company is going to fail, MHR should make its bond payments.
It has a yield of 2.75%. Morningstar rates it of medium credit quality and medium interest rate sensitivity.
Due to the relatively low credit quality, a prudent investor will probably not want to have a huge proportion of their money in the JNK ETF; but such an investor may want to put some of his or her bond money in it in order to raise the overall bond investments yield.
If you then hold these bonds to maturity, you will collect the interest for the bonds; and you will get your money back at maturity.
The 5-year US Treasury is yielding 1.73%. The 2-year US Treasury is yielding 0.47%. If a corporate bond yielding 4% is only one year from maturity, it will trade at a substantial premium to par.
How do you then invest in bonds, if they are likely to lose value? One answer is to buy intermediate-term (3-10 years to maturity) corporate bonds.
Further, as the bonds the ITR ETF owns get nearer to maturity, they will then trade at a premium to their stated yields.
If you want more risk with higher yield, some investors may wish to consider one of the better Bakken junior E&P companies, Magnum Hunter Resources Corp.
Andrew Goldberg, global market strategist at JP Morgan Asset Management, said that looking across the 10-year period from 2003 to today, the worst year for investment-grade bonds was 2008, when they lost 5.1pc. That compares with equities that fell 26pc, commodities that dropped by 36pc and investment trusts that slumped by 37pc.
Shockingly, investors still have more than half of their savings held in cash or on deposit, all being eroded by inflation, despite research showing that the risk of losses from holding investment-grade bonds for the long term is 1pc Photo: I.
Shockingly, investors still have more than half of their savings held in cash or on deposit, all being eroded by inflation, despite research showing that the risk of losses from holding investment-grade bonds for the long term is 1pc.
The gross redemption yield is the return investors will get from holding the bond to maturity, first from the coupon, which is then adjusted depending on what price they have to pay for the bond in the market.
Corporate bonds: one way to preserve your capital and look forward to a fixed income Corporate bonds guarantee income, reduce risk, increase returns and are easy to buy over the phone.
When investors buy bonds they instantly lower their risk, reduce the chance of losses and ease those sleepless nights by creating a more balanced portfolio.
Unlike equities, bonds are excellent at preserving capital, making them the ideal place for people who need to make a payment at a certain time, such as a mortgage deposit, or who don’t want to suffer losses, such as those approaching retirement.
Once you are familiar with corporate bonds and gilts, including how they work, you can place a deal in an existing Vantage account online, or by calling our dealers on 0117 980 9800 during market hours (Mon-Fri, 8:00am-4.30pm). Bonds may not be suitable for all investors and neither income nor capital is guaranteed.
And it shouldn’t come as a surprise that the New York Stock Exchange saw an opportunity in the bond market and launched its NYSE Bonds system in April 2007, replacing the older Automated Bond System with something that is friendlier to small investors.
If you’re interested in buying a corporate bond on the secondary market, make sure that you do enough research to know if the price you pay for the bond is justified.
The first, or primary market, represents new issues When a corporation decides to sell bonds to raise capital, it negotiates deals with investment bankers and large institutional investors to place those bonds in the market.