Choosing a Bond

Provided By www.stockandbonds.org

Selecting a bond that fits your portfolio can be difficult, so as always we recommend careful research, competitive comparisons and a consultation with an experienced broker. That said, bonds are some of the safest investments out there.

Some of the matters which should be borne in mind are: type of business (rail–road, manufacturing, public utility); bond type (mortgage or debenture); term, rate of return, special features (callable, convertible, etc.); financial status of issuing company; coverage of interest charges, which should be ample; relationship to other bond issues.

While bonds are quoted on a day-to-day price basis, they do not characteristically fluctuate as widely as common stocks—at least the high-grade bonds do not; the medium- and lower-grade bonds are subject to rather sharp fluctuations, and for this reason are perhaps even inferior to higher grade preferred stocks for the investor of modest means.

No discussion of the investment merits of bonds would be complete if it did not summarize the "case for bonds" as against the tendency of many people today to think entirely in terms of common stocks, simply because we have been in the longest sustained high stock market in history.

The following items may be pertinent to the case:

1. In poor times stocks may have their dividends curtailed or even omitted, while the return on bonds must be continued in order to avoid reorganization and bankruptcy.

2. In the case of financial disaster the claims of the bondholders must be considered first; all stockholder claims are considered only after all bondholder claims have been completely satisfied.

3. Bonds provide a hedge against deflation and therefore must be a part of any investment plan.

4. In a depression, when securities paying a good and secure rate of return are much in demand, the price of good-grade bonds tends to rise and will remain high as long as times do not improve.

5. For older people who are anticipating retirement, bond investment offers a certain and secure return, which is relatively free from worry (except for possible future inflation).

6. There are certain tax advantages inherent in the ownership of certain state and municipal bond issues. For some individuals this may be very desirable.

7. The bondholder is a creditor, while the stockholder is a partner in the business. The latter takes all the risks, while the former has his interest protected by the contract, which guarantees him a stated rate of return, the final return of his invested capital, and a prior claim upon assets in case of financial difficulties.

One further important consideration must be borne in mind. All earnings are taxable in computing the corporation income tax liability during any given year of operations. The interest requirements of a bonded indebtedness are deducted from earnings as a business expense before such tax liability is computed; the advantages of this arrangement are quite considerable. This and other matters pertaining to bonds will be discussed in a later section.

Sadly, some investors simply overlook bonds as unworthy investments due to their relatively low long-term return. However, they can be a welcome addition to a balanced portfolio -- and who knows? In the event of a nation-wide financial crash, they might be your best bet after all.

This article is a small snippet from www.stockandbonds.org

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