The What, Why, and How of Corporate Bonds

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When investing, the most common advise you’ll get is to diversify. The rationale is simple: a diversified portfolio leads to a lower risk of losing money when things go awry. But diversification is not as simple as getting different buckets of investments.

The simplest way to build a diversified portfolio is to make investments that differ in terms of investment term, risk, and potential returns.

And the sooner you diversify, the better. Keep in mind that when an average investor reacts to drastic changes in the market, at least 80% of the damage would have already been done.

Perhaps the bigger question now is, what specific types of investments should you go for? In this article we’ll be discussing a long-term investment: Corporate Bonds.

What are Corporate Bonds?


Corporate bonds are debt obligations (or IOUs) issued by companies to the general public and institutional investors to raise capital. As bond investor, you will be entitled to a steady stream of coupon payments because the interest rates are fixed. The bond is then repaid in full at maturity date.

To better understand corporate bonds, let’s compare it to a more common investment—stocks. When you buy a common stock, you’re basically buying equity (ownership interest) in the company. With a stock, can earn in two ways: (1) through an increase in the market value of the stock or (2) through dividends paid out by the company. However, there is no guarantee that either of these benefits will happen, and equity investors are usually last in line to receive any amount in case the company goes bankrupt and is liquidated.

On the other hand, buying a corporate bond is a debt obligation and doesn’t give you ownership interest in the company. You will only receive the interest and principal on the bond, no matter how well the company performs. The company’s obligations to its bondholders are generally superior to equity holders. If the company goes bankrupt, you will have a superior position over its liquidated assets as compared to equity holders. On extreme cases such as bankruptcy, bond investors have priority over shareholders in claims of the company’s assets.

On extreme cases such as bankruptcy, bond investors have priority over shareholders in claims of the company’s assets.

Why invest in Corporate Bonds?


 

Aside from the aforementioned logic of diversification, there are 4 key advantages to investing in corporate bonds:

  1. They are affordable – Minimum investment amount of P50,000.
  2. They are liquid and tradable – You can buy/sell bonds in the open or secondary market.
  3. They provide steady cash flow – You earn fixed interest or coupon payments on pre-defined dates
  4. They promote economic activity and you get good returns

We’ve compiled everything you need to know about Corporate Bonds in this infographic:

 

Risk of Investing in Corporate Bonds?


  1. While the claims of bondholders are superior to those of equity holders, there is no guarantee that bondholders will receive all or a portion of their principal investment and interests in case the borrowing company defaults.
  2. Corporate bonds are not insured by the Philippine Deposit Insurance Corporation. Principal amounts invested may be adversely affected in case the issuer defaults.
  3. Prices of corporate bonds in the exchange may change based on prevailing market conditions.
  4. Corporate Bonds are less liquid than equity instruments (such as listed stocks)

We’ve compiled everything you need to know about Corporate Bonds in this infographic:

Before making any investment decision, always consider your personal financial roadmap, the level of risk you are willing to take, among many others.

If you’re interested in investing in Peso Corporate Bonds, we have a page that we update whenever there’s an offering.

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