How to find a Company Bond RatingThis is how you find a rating for corporate bonds
Which is a company bond? Company bond is a indebtedness of the company. When a company needs to lend cash, it can go to a local financial institution and ask for a credit or ask for a bond for an investor to buy. So why should a company spend a bond and not lend from a banka?
Businesses have to interest on the cash they take out. When they think that they can lend the funds on better conditions from an investor, they will be issuing a bond. How much do I get in exchange for my investment in company bond issues? Interest is paid on a periodic basis, also known as a voucher, usually once or twice a year, for the term of the bond.
By the end of the bond period, which is arranged in advance, the company should repay you your cash. What interest do I get on a bond? Maturity of the bond has a major impact. Generally speaking, the longer the maturity, the higher the interest rates, with the investor being remunerated for foregoing their cash for longer durations.
Company performance will also impact the interest level. In the event of an increased default by a company (non-repayment of the bond), shareholders are expecting higher interest charges. It also explains why some sovereign debt pays such low interest rates: because an investor believes that a sovereign is more likely than a company to give back its cash.
In order to help an investor judge the risks of a corporate failure, rating firms such as Moody's, Fitch and Poor's will rate the bond's creditworthiness. As an example, a bond's rating from SDB is between "AAA" (highest rating - least likely) and "D" (junk - more likely), according to its own rating series.
Higher interest paying loans - and the investment fund that invests in them - are called high yields. One of the great advantages of the bondholders as creditors of the company is that they are higher on the investor roster when it comes to getting your cash back if the company fails.
So should I buy company loans and not stocks? For very long time, equities have been tending to generate more returns than corporates, but they are tending to bear more exposure. World equities have risen 6.5% per annum since 2000, up from 5.4% for full yield performance globally (including dividends/interest payment and equity gains).
Numbers are calculated using the Bank of America ML Global Corporate Bond Index and the MSCI World Equities Index. Why should I invest in corporate debt rather than equities? It is argued that bond yields tended to be quieter as their interest rates are often firm and make a significant contribution to the overall yield of the bond.
Better long-term price profits over the past 17 years conceal their unsteady (volatile) outperformance. The following graph shows that over the past two centuries equity investments have had to keep their finger on the pulse of the times. In 2008, for example, at the peak of the twentieth century economic downturn, the share price fell by 40 %.
3 percent compared to 2007, as shareholders were selling their stakes in fear of financial meltdown. Over the same time frame, corporates declined by only 4.7% and increased by 16.3%. In the last ten years, UK and US corporates have yielded 2.5% and 4.2% respectively in terms of actual returns, net of inflation, each year.
That' compared to 2.3% and 4. 9 percent for British and US equities. Diversity is one of the reasons for holding stocks as well as loans. Occasionally, when bond price rises in a given bond exchange segment, stock price falls and the other way around. There is never a guaranty, but it is reasonable to say that the relatively stable nature of corporates could help offset a portfolios and smoothen the years when stock exchanges are more volatile. However, it is also true to say that the relatively stable nature of corporates can help to reduce the volatility of a given year.
Company bonds: Global BofAML Corporates Index. Each index is evaluated on a cumulative yield base (including dividends/interest paid and equity gains).