Published by Kauders Portfolio Management, Authorised and regulated by the Financial Services Authority
Reading yet another piece about corporate bond funds reminded me of how the word "bond" has been debased.
A Bond issued by a Government has its income and maturity repayment guaranteed by that Government. A bond issued by a company has only that company's guarantee. Companies may appear to be "blue chip" i.e. Barings and Marks and Spencer but even these companies have problems and there is no knowing if they will be with us for ever. The life cycle of most companies is amazingly short. You must, therefore, weigh up which bonds have worthwhile guarantees and which do not.
Just to restate the certainty. If you want a GUARANTEED return in say 9 years time then a gilt maturing in 2009 and HELD UNTIL THEN provides a return at the lowest possible risk. Currently you can get about 5¼% yield for those 9 years. THE OFFER OF ANY HIGHER YIELD INVOLVES RISK.
Risk is not always obvious. Recently a large building society paid out 0.07% interest on a maturing bond. Most investors expected far more -at least they got out without loss.
Corporate bonds offer a higher yield because they are risky. Private investors all too easily overlook the risk. Default rates - the proportion that do not pay - are rising.
I REPEAT THERE ARE BONDS AND BONDS
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