The Exciting Combination In Bond Exchange Traded Funds

A new financial instrument has appeared in the form of bond exchange traded funds. This innovation teams exchange-traded funds with bonds and combines their best qualities. In addition, these new funds add transparency to bond investments, which makes these exchange-traded funds an improvement over the old way of investing in bonds. 

Bond exchange traded funds appear to have much in common with mutual funds. They are, in fact, the source of the idea for exchange-traded funds. Exchange-traded funds differ from mutual finds primarily in their ability to be traded on the market exchanges, just as if they were stocks. Bond exchange traded funds share a similar distinction. They have many of the qualities of bonds, but investors can trade them as if they were stocks.

Bond exchange traded funds have done much to enhance the reputation of bonds. These government-issued debt obligations have always been viewed as boring but safe. When the market is unstable, many investors will place a larger-than-normal portion of their cash in bonds. This prevents them from suffering from negative fluctuations in the market but it also prevents them from using those funds to invest in sudden opportunities presented by stocks that are due to break out. 

A New Option With Bond Exchange Traded Funds 

Bond exchange traded funds have changed bonds’ lackluster appearance. These new financial instruments offer investors the safety of bond investments without the accompanying immobility of their money. Bond ETF’s present a new option for investors seeking refuge from a volatile market. They can invest in these funds without getting tied down for long periods of time. If the market makes sudden improvements, as it tends to do, then they can move their money much more easily back into stocks. Bond exchange traded funds also present a transparency that bond investments always lacked in the past.

High Yield Corporate Bonds Are The Last Frontier Of Profitability

Today’s maddening market environment has traders everywhere looking for safe, but nevertheless profitable places to park their money, and the answer to this dilemma would seem to be found in high yield corporate bonds. After all, everyone who reads the financial pages knows that corporations have been making record profits due to their extensive efforts at restructuring. This means that blue chip enterprises are lean, well-managed, well-capitalized, and therefore unlikely to be a bad investment.

Volatility: Why High Yield Corporate Bonds Are A Smart Play 

Even as large industrial companies amass piles of cash from their ongoing operations, they nevertheless remain subject to a series of hair-tearing price swings on account of general concerns over the world economy. Since these external factors have rendered corporate stocks unreliable until conditions ameliorate worldwide, prudent investors are turning towards corporate paper as a solid, but still high yield corporate bonds, vehicle for keeping their money at work. Even as they lock in guaranteed income streams, they simultaneously insulate themselves against irrational market moves that could wipe out their principal through some Black Swan event.

Of course much money is moving into wealth preservation assets such as gold and US treasuries, but these investments are pure wealth preservation plays that offer almost no return at all. High yield corporate bonds offer a medium investment path that splits some of the difference between safety and profitability. Not every investor can simply give up the monthly income which they have come to rely upon to cover their monthly bills in the face of an uncertain world economy. Bills still have to be paid. Particularly for retirees, high yield corporate bonds can keep the cash flowing long after their days of high risk wheeling and dealing are behind them.

Investing In Corporate Bonds Is An Attractive Alternative to Stocks

For investors who want to invest in the private sector of the economy, Investing In Corporate Bonds is an attractive alternative to investing in the highly volatile stock market.  There are a wide variety of Corporate Bonds from triple A rated bonds  issued by well known corporations to junk bonds issued by companies in a state of financial distress.  Investors invest their money in Corporate Bonds to receive periodic interest payments from corporate bond issuers.

Although Corporate Bonds can vary in price over time, the typical price changes in corporate bonds are extremely small in comparison to stocks.  This stability makes Corporate Bonds an attractive investment for more conservative investors who want to earn money on their investments but do not want to endure market volatility.  Corporate Bonds are also preferred by some investors because in the event of bankruptcy, holders of Corporate Bonds will be compensated before stockholders.

Not All Corporate Bonds Are The Same

There are thousands of corporations in the United States that issue Corporate Bonds.  Not all of these Corporate Bonds are the same.  The bond yield, or interest paid on the bonds, varies depending upon the credit rating given the bonds and the length of maturity of the bonds.  Generally, bonds that have good credit ratings of AAA or close to AAA have lower interest rates since the risk of default is lessened when purchasing bonds with good credit ratings.  Investment grade Corporate Bonds are rated from AAA to BBB-.  Below BBB- Corporate Bonds are considered non-investment grade bonds or “junk bonds”, which pay significantly higher interest rates to attract investors to buy these higher risk Corporate Bonds.  To entice investors to invest their money for long periods of time, Corporate Bonds that have long maturity dates have higher interest rates than Corporate Bonds with short maturity dates.  For more information about junk bonds, see:  The Junk Bond Market Offers High Yield Returns.

While buying highly rated investment grade Corporate Bonds is considered a low risk investment, such an investment still carries the real risk of total loss should the corporation that issues the bonds file for bankruptcy and the bonds fall into default.  To eliminate the risk of owning Corporate Bonds that fall into default and become worthless, a good risk mitigation strategy is to buy mutual funds or Exchange Traded Funds (ETFs) that invest in the Corporate Bonds and offer attractive dividends that are based on the yields provided by the Corporate Bonds that they hold.  Another advantage of buying mutual funds and ETFs that invest in Corporate Bonds versus buying individual Corporate Bonds themselves is that the mutual funds and ETFs are managed by professional money managers that seek out the best Corporate Bonds to invest in and are capable of foreseeing default problems and selling bonds that are in danger of default.  Also, Corporate Bonds mutual funds and ETFs offer liquid trading markets that make it easy for investors to buy and sell them, whereas individual Corporate Bonds may be thinly traded and difficult to efficiently buy and sell.

After the stock market volatility in recent years, including the sharp drop in the stock market in 2008 and 2009, many investors are seeking places to invest their money that offer substantial investment returns without the risk of substantial loss of investment capital and without having to endure excessive volatility.  Investing in the Corporate Bonds is a good way to for investors to earn decent investment returns without risking their investment principal.

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Municipal Bonds Have Fallen In Value Due to Default Concerns

Municipal Bonds have been out of favor during 2011 because the well regarded financial analyst Meredith Whitney warned in November 2010 about potential defaults in the Municipal Bonds sector, which caused many investors to sell their holdings in Municipal Bonds.  Many Municipal Bonds, and Municipal Bonds investment vehicles such as Municipal Bonds Exchange Traded Funds (ETFs), lost 10% to 20% of their value due to the analyst’s warning, and have yet to fully recover from the price drop.  This price drop has created an excellent buying for opportunity investors interested in investing money in Municipal Bonds.

Many investors rely too heavily of stocks for generating investment returns over long periods of time.  This is largely due to the allure that the stock market has for exceptional profit opportunities and the media coverage of the stock market versus other asset classes.  However, investment advisors almost universally recommend that maintaining a balanced investment portfolio is the best way to protect one’s investments from downturns in various asset classes, such as stocks and real estate.  Typically, a 20% to 30% investment in highly rated bonds is recommended, with even higher bond investment percentages for investors who are near or in
retirement.

Municipal Bonds Offer Tax Free Income

For those looking to shift some of their investment portfolio into bonds or increase their exposure to bonds, now could be the right time to buy Municipal Bonds, as they continue to trade at reduced levels after the late 2010 analyst downgrade.  This is due to ongoing concerns about Municipal Bonds defaults, as the United States economy continues to expand slowly, with indications that a new recession could be brewing due to the European debt crisis.  However, these concerns about Municipal Bonds defaults so far appear to be overblown, as the default rate for Municipal Bonds has not be unusually high in 2011.

What really makes investing in Municipal Bonds appealing is the tax free income that they provide.  Depending on the type of Municipal Bonds and where one lives, an investor may be able to earn tax free interest that is free of local, state, and federal income taxes.  With some Municipal Bonds offering 7% yields, their tax free income is especially appealing in the current low interest rate environment in which many savings accounts earn less than 1% in taxable interest.  Another reason that Municipal Bonds are an appealing investment at this time is that if the Municipal Bonds market recovers from its current slump, investors will not only earn tax free interest on their holdings in Municipal Bonds, but could also make money on the appreciation of the price of the bonds, as they increase in value.  The money made on the appreciation of the price of the bonds would be considered a taxable capital gain when the Municipal Bonds are sold.

Since it is not practical for most individual investors to research the risks associated with investing in specific Municipal Bonds and putting all one’s investment eggs into one bond is not a good investment strategy, it is recommended to invest in Municipal Bonds via an investment vehicle such as an ETF or mutual fund.  There are many ETFs and mutual funds that invest in Municipal Bonds in specific states, thus ensuring that the income earned by investing in Municipal Bonds is tax free in the state in which an investor lives.

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The Basics of Investing In Government Bonds

Investing In Government Bonds, in particular United States Treasury Bonds, is a “safe haven” investment that investors have relied on for years to provide steady returns on investment in the form of periodic interest payments by the United States government.  Investing In Government Bonds in the form of United States Treasury Bonds is considered a “safe haven” investment because regardless of the state of the economy, the United States government is viewed as an entity that can be relied upon to make interest payments on their debts.  There are a number of different types of government bonds to consider, from United States Treasury Bonds issued by the federal government to Municipal Bonds, which include bonds issued by local, county, and state governments.

Interest earned from United States Treasury Bonds is not usually taxed on a local or state level, but is subject to federal taxation.  Interest earned from Municipal Bonds is not subject to local, state, or federal taxation, which make municipal bonds appealing to investors looking for a tax haven.

Investing In Government Bonds – The Benefits and Risks

The United States Treasury sells government bonds with a variety of maturity periods, ranging from three months to thirty years.  The interest rate paid to investors holding United States Treasury Bonds is determined during the initial auction of the bonds; the longer the maturity, the higher the interest rate.  For example, the popular 2-year, 10-year, and 30-year United States Treasury Bonds currently provide annual interest rates of 0.35%, 2,80%, and 4.12% respectively.  On a historical basis, the interest rates paid on United States Treasury Bonds are currently very low, and the bonds are selling at elevated levels.  This is due to the 2008 financial crisis and subsequent severe recession and slow economic recovery, which has resulted in an enormous demand for United States Treasury Bonds from investors seeking a safe place to invest their money.  Investors who are interested in Investing In Government Bonds should take this into consideration because when the United States economy returns to a healthy condition, the value of United States Treasury Bonds that are brought at currently elevated levels will likely fall, as demand subsides and investors sell government issued bonds to seek out higher investment returns elsewhere, such as via the stock market.  This would cause a loss of investment principal for investors who invest in government bonds at currently elevated levels.

The 2008 financial crisis had a much different effect on Municipal Bonds than United States Treasury Bonds, which needs to be understood by those considering Investing In Government Bonds.  With local, county, and state governments reeling from the financial crisis, housing market meltdown, and the severe recession that followed, concerns have been raised about the ability of local, county, and state governments to make interest payments on the Municipal Bonds that they have issued, raising the possibility of large scale defaults in Municipal Bonds.  This has caused investors to sell their holdings in Municipal Bonds, which has caused Municipal Bonds to lose 10% to 20% of their value.  Unlike United States Treasury Bonds that are currently overvalued on a historical basis, Municipal Bonds are currently undervalued on a historical basis, which makes them attractive to investors looking to protect their principal investment.  Municipal Bonds are still at risk of widespread defaults, should the United States economy fall back into a recession in the near future.  But if the United States economy recovers, Municipal Bonds could appreciate nicely in price as they pay out tax free interest payments to the holders of the bonds.  For more information about Municipal Bonds, see:  Municipal Bonds Offer a Safe Way to Earn Tax Free Income.

Since 2011 is a year in which a slow economic recovery is occurring after a severe recession, Investing In Government Bonds has a number of risks and opportunities that are not normally present in the government bond market.  However Investing In Government Bonds is still be viewed as one of the safest ways to invest money.

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Investing In Bonds In 2011 – What You Need to Know

Investing In Bonds In 2011 is more complicated than usual because investors who were spooked by the sharp drop in the stock market in 2008 and 2009 have invested their money heavily into bonds in recent years, which has caused highly rated bonds and bond funds to trade at elevated values during 2011.  Making the situation even more complicated is the fact that municipal bonds and municipal bond funds are currently trading at depressed levels due to concerns about municipal bond defaults.

What this all means is that Investing In Bonds In 2011 is not the same as investing in bonds during a typical economic period with moderate to robust economic growth.  In 2011, an investor’s bond trading strategy will be influenced by the type of bond one is contemplating investing in and their investment strategy and goals.

Investing In Bonds In 2011 – Investing Strategy Depends On The Type of Bond

Investors often seek out highly rated bonds for the safe and secure returns on principal that highly rated bonds pay out as interest payments.  Bonds are rated by major rating agencies such as Standard and Poors and Moody’s.  Bonds that are rated BBB- and above are considered investment grade bonds.  Investors who put their money into highly rated bonds face little risk of losing the principal invested due to a default on interest payments by the bond issuer.  The risk of bond default decreases with higher rated investment grade bonds, with AAA being highest rated and least risky bonds.  The trade off for investors is that the less risky the bond, the lower the interest payment, due to the higher demand for less risky bonds and the lack of a risk premium.

In normal times, the principal invested in highly rated bonds and bond funds is not considered to be at risk, and the risk of principal loss is not factor into an investors decision to buy highly rated bonds and bond funds.  However, Investing In Bonds In 2011 is different than bond investing is in normal times because highly rated bonds and bond funds are trading at elevated prices in 2011 due to all the buying interest from investors during the preceding three years.  Once the bond market returns to a more normal trading level, sometime after 2011 when the economy makes a sustained economic recovery, the highly rated bonds and bond funds will lose some of their principal as investors sell, perhaps as much as 20%.

Due to the low interest rates and the potential for loss of principal in investment grade bond investments, Investing In Bonds In 2011 means investors need to look at junk bonds to earn substantial interest payments and municipal bonds to earn modest interest payments.

Junk bonds provide significantly higher yields than more highly rated investment grade bonds, due to the higher risk of default associated with issuers of junk bonds.  Investors demand higher yields from junk bonds in exchange for assuming a higher risk of default.  However, this trade off may be worth it to bond investors Investing In Bonds In 2011, since junk bonds offer attractive interest rates that are not available elsewhere.  Junk bonds also have little risk of principal loss, if they are brought via a junk bond mutual fund or Exchange Traded Fund (ETF).  These funds spread the risk out and avoid junk bond defaults.  Unlike investment grade bonds, junk bonds and junk bond funds are not trading at a premium in 2011, so as long as an investor avoids the principal risk associated with owning individual junk bonds by buying junk bonds via a mutual fund or Exchange ETF, their principal invested will be relatively safe.  For more information about junk bonds, see:  The Junk Bond Market Offers High Yield Returns.

With the potential for appreciation of the principal invested, Investing In Bonds In 2011 is different than normal times in the municipal bond market.  Because concerns have been raised regarding potential defaults in municipal bonds, as local, county, state governments struggle with fiscal challenges due to the 2008/2009 recession, bond funds that invest in municipal bonds are trading at depressed levels in 2011.  A sustained economic recovery after 2011 should cause municipal bonds and municipal bond funds to increase in price, thus providing an increase in the principal invested in municipal bonds and municipal bond funds.  It should be noted that if the economy goes into another severe recession, funds invested in municipal bonds could fall substantially if defaults in municipal bonds occur on a widespread scale due to cash flow problems at local, county, and state governments.  For more information about municipal bonds, see:  Municipal Bonds Offer a Safe Way to Earn Tax Free Income.

Investing In Bonds In 2011 is very different than a typical year, and therefore, investors need to look closely at what kind of bond or bond fund they are thinking of investing in during 2011, and what market forces are impacting the bonds and bond funds they are considering investing in.

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The Junk Bond Market Basics

Many investors stay away from the Junk Bond Market because they perceive investing in junk bonds as being inherently risky.  As their name implies, junk bonds are bonds issued by companies that are in some state of financial distress and have bonds that are rated by major bond rating agencies below investment grade due to the higher risk of default by the distressed bond issuers.  Bonds that trade in the Junk Bond Market carry much higher yields than more highly rated investment grade bonds, due to their higher risk of default.  Investors demand higher yields from junk bonds in exchange for assuming a higher risk of default.

Investing in the Junk Bond Market For High Yield Returns

While investing in individual junk bonds is definitely more risky than buying highly rated investment grade bonds, there are ways to play the Junk Bond Market that reduce the risk associated with owning junk bonds.  There a number of mutual funds and Exchange Traded Funds (ETFs) that invest in the Junk Bond Market and offer attractive dividends that are based on the high yielding junk bonds that they hold.  The advantage of buying mutual funds and ETFs that invest in junk bonds versus buying individual junk bonds themselves is that the risk of a bond default and losing your investment principal is greatly reduced, since mutual funds and ETFs invest in numerous junk bonds.  Also, junk bond mutual funds and ETFs are managed by professional money managers that seek out the best junk bonds to invest in and are capable of foreseeing default problems and selling bonds that are in danger of default.  Finally, junk bond mutual funds and ETFs offer liquid trading markets that make it easy for investors to buy and sell them, whereas individual junk bonds may be thinly traded and difficult to efficiently buy and sell.

Investors who were spooked by the sharp drop in the stock market in 2008 and 2009 are seeking places to invest their money that offer high yield investment returns without the risk of substantial loss of investment capital.  Investing in the Junk Bond Market is a good way to for investors to earn decent investment returns without taking excessive risk with their capital.

There are many different junk bond funds that invest in a wide variety of junk bonds with various bond ratings and maturity dates.  One of the better known junk bond funds in the Junk Bond Market is the Barclays Capital High Yield Bond (Symbol:  JNK).  JNK offers an attractive 5.43% annual rate of return, and reduces its risk by investing in dozens of junk bonds issued by various companies.

An investor who wishes to diversify their investments into bonds, but does not want to give up the high rates of return that can be attained in the stock market, should consider junk bond funds.  The Junk Bond Market offers exceptional rates of return on investment capital for those willing to invest in below investment grade bonds.

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How Bond Funds Reached Current Elevated Levels

Bond Funds, including mutual funds and Exchange Traded Funds (ETFs), that invest in a wide variety of bonds (both government and corporate) have done well since the financial crisis of 2008 and 2009.  The reason why Bond Funds have done well in recent years is because investors who were spooked by the sharp drop in the stock market in 2008 and 2009 sought out safer places to invest their money.  Not wanting to put their cash in low yielding bank savings accounts, investors piled into Bond Funds, which pushed the price of Bond Funds higher.

Many investors have done well over the past two to three years with the strategy of investing their money in Bond Funds, as their money has been earning a decent steady rate of return.  The weak economic recovery and reluctance of the Federal Reserve to raise interest rates has caused demand for bonds and Bond Funds to continue to be strong, which has supported the price of Bond Funds, as strong money flows have keep buy side pressure on Bond Funds.

While investors jumped into Bond Funds because they were looking for a safe haven during the 2008 and 2009 financial crisis, investment advisors recommend maintaining a 20% to 30% investment in highly rated bonds during all times to diversify one’s investments across multiple asset classes.

The Current Risk Associated With Buying Bond Funds

With bonds and Bond Funds currently at elevated levels due to the buying pressure over the past three years, the question must be asked whether buying Bond Funds is currently risky since in a normalized economy the bonds and Bond Funds should revert to their mean and fall in price.  Those who brought Bond Funds before or early on in the 2008 and 2009 financial crisis are sitting on good positions that have earned interest over time, and have little risk of losing money on the principal that they invested in Bond Funds.  However, those who are contemplating purchasing Bond Funds now, at their current elevated price levels, need to realize that there is a real risk that once the economy returns to normal, and growth rates and interest rates start to rise, the Bond Funds will fall in price, as buying pressure eases and holders of bonds and Bond Funds sell.  This will put their investment capital at a risk of a slight loss as the value of the Bond Funds they hold decrease.

The potential for a slight loss from buying Bond Funds now may seem acceptable to some investors since the economy currently appears to be slowing, and another recession may be on our doorstep.  Another recession would ensure that Bond Funds will maintain their elevated levels for a prolonged period of time, allowing the buyer of Bond Funds to recoup some of their initial investment via interest payments on the bonds held by the Bond Funds.

It should be noted that due to concerns about defaults in municipal bonds, Bond Funds that invest in municipal bonds are actually at depressed levels, so the risk of buying these funds at elevated levels is not a factor.  However, funds invested in municipal bonds could fall substantially if defaults in municipal bonds occur on a widespread scale due to another recession causing cash flow problems for state and local governments.  For more information about municipal bonds, see:  Municipal Bonds Offer a Safe Way to Earn Tax Free Income.

There are many different Bond Funds that invest in a wide variety of bonds with various bond ratings and maturity dates.  Although, the risk associated with buying Bond Funds now and incurring a loss of principal when the economy recovers is something to consider, Bond Funds are worth considering for the relative safe and secure returns that they provide.

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 What Is the Definition of a Corporate Bond?

A corporate bond definition is a descriptive term that explains the nature of a debt instrument issued by an entity other than a natural person, such as a publicly-held corporation. Corporate bonds are generally issued in lieu of a traditional bank loan. The attraction of a bond, as opposed to a loan or a line of credit, is that the corporation is relying on its own credit rating, and not entangling its capital assets as collateral for a loan with a third party such as a bank. In other words, a company offers no security for the loan, other than its good name. If the bond goes into default, there is no legal recompense for the creditors to seize company assets to regain all or a portion of their investment.

Alternatives to Instruments That Meet Corporate Bond Definition

Many investors are familiar with stock offerings as a way for corporations to raise cash. The problem with raising additional cash through the sale of more corporate stock is that the current stockholders face dilution of their share of the company. For example, say a company has 100 shares of stock and elects to raise cash for a new assembly line by selling an additional 100 shares. Whereas the current holder of 1 share of company stock owned 1 percent of the company, he now holds 1 out of 200 shares of stock and thus only has .5 percent of the company. The company may be more valuable on account of the new investment, but he now has much less say in how things are run. Issuing a financial instrument that meets a corporate bond definition allows the current stockholder to retain his full percentage of voting rights in the company, but now sees the value of his stock encumbered by the debt and debt service that comes with issuing corporate bonds.

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Investment Bonds Rates

 Investment bonds rates and details can be overwhelming. It is hard to keep track of your investments, whether they are short-term or long-term. With any investment, your goals and time frames are of the utmost importance. The amount of risk you are willing to take with the investment should also be considered.

Investment bonds rates help you place your money in a safe manner. Any time you are considering a strategy that includes investing in bonds, you will want to remember that diversification is key. It is always best to keep your assets spread apart so that if one single investment goes the wrong way, you will not lose all of your investment cash. The various rates on the bonds will help you determine which bonds to choose.

Investment Bonds Rates Options

To fully diversify your investment portfolio, you will want to choose bonds that originate within different companies in dissimilar market sectors.  As you continue your investment options in the future, you will learn which companies you enjoy working with and which cause complications. You will also want to take a look at the maturity of the bonds. By choosing bonds with different levels of maturity, you will be able to lower you risk.

The investment bonds rates can also help you earn interest and preserve your principal at the same time. Your goal should be to keep your invested money in tact while adding interest. For a practiced eye, the rates the bonds carry can help determine the level of risk involved in the investment.

When it comes to planning your financial future, investing is a key part of the overall package. There are many parts that make up the whole portfolio and investment bonds rates are a crucial part of any investing strategy.

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