The Financial Advisor’s investment case Corporate Bonds as a Viable Investment Vehicle
The Financial Advisor’s investment case
Corporate Bonds as a Viable Investment Vehicle
The Sourland Mountain in New Jersey investment club has recently asked you to give a presentation on investing in corporate bonds. Club members have previously invested solely in corporate stocks, but several members have expressed an interest in diversifying the portfolio through investing in bonds. Although you do not often give presentations, you believe that this one exception may introduce your financial planning services to potential clients. Since you don’t know the background of the club members or what they expect in the presentation, you suggested that they send you several questions as a means to start the general discussion. You received the following questions:
1. What are the primary differences between investments in corporate stock versus corporate bonds?
2. Since bonds pay interest, does that imply the individual’s risk exposure is less for investing in bonds rather than stock?
3. What are the mechanics of purchasing bonds? May the investor leave the bonds with his or her broker?
4. Since a bond has a maturity date, does that imply the investor holds the bond to maturity?
5. Can the investor expect to earn higher returns on a firm’s bonds than on its stock?
6. Are high- yield securities an acceptable investment for an investment club or its members? The questions obviously cover many facets to consider when investing in bonds. You believe that the presentation will be improved if you also illustrate bond investments as part of a tax- deferred retirement account or a means to achieve diversification, so you pose these additional questions:
7. From a tax perspective, which should an investor acquire for a retirement account: a firm’s stock or its bonds?
8. · If an individual owns stock and acquires bonds issued by the same company, does the purchase diversify the investor’s portfolio?
9. · How does an individual construct a diversified bond portfolio? How can an investor use bonds to help diversify the total portfolio?
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