Bonds are fixed income investments that have maturities of ten years or more. Bonds represent the long-term financial foundation of any government or corporate entity. The long-term viability of a bond issuer is reflected in the company’s interest rate in relation to risk free rate paid on US Treasury bonds with the same duration.
Foreign and emerging market bonds provides high yields and return of principal that must be translated into US dollar terms based on any fluctuations in the currency exchange rates.
High yield distressed bonds pays a high yield in percentage terms because the market value is discounted so heavily. The discounted valuation for high yield bonds can provide an opportunity for an equity-like rebound in price with better liquidation preference than equities, if company earnings do not turnaround.
The amount of funds invested in bonds should represent the long term allocation for an investor’s optimal asset allocation between stocks and bonds based on the investment policy statement. The mix between stocks and bonds can control the level of the expected risk and return for a portfolio. Municipal bond investments can substitute allocations into taxable bond with similar credit and liquidity risks and duration. The various notes which an investor should consider include:
- Treasury Bonds
- Government Agency Bonds
- Mortgage Backed Securities
- Municipal Bonds
- Corporate Bonds
- High Yield Bonds
- Emerging Market Bonds
The amount of funds invested in bonds should represent the long term allocation for an investor’s optimal asset allocation between stocks and bonds based on the investment policy statement. The mix between stocks and bonds can control the level of the expected risk and return for a portfolio. Municipal bond investments can substitute allocations into taxable bond with similar credit risks and duration. When investing in bonds consider the following investment issues:
- Diversification
- Systematic Risk
- Time Horizon
- Liquidity Needs
- Tax Characteristics
A financial advisor can help determine the appropriate portion of your investment portfolio that should be invested in bonds, and which type of bonds based on your personalized investment policy statement designed to reach your True North.
