bond-cds-bond funds

[bobbee25]

Are my assumptions correct?:

Corporate bonds are similar to CDs with an increase in risk and reward.
I noticed numerous corp bonds from good companies paying 6 or 7%.

If you checkout the issuer, you are probably better off with individual bonds, maybe a ladder, than with a bond fund.

 

[2B]

With individual bonds, diversification becomes much more difficult. Also, many individual bonds aren't available to individual investors unless you have millions to invest in an indivual issue. The secondary market has a mere fraction of the corporate bonds that have been issued. As far as "checout the issuer" goes, I think Enron was the number 7 stock in the S&P500 the day it announced it was going into bankruptcy. I also think it had just under a AAA credit rating.

Unfortunately, a bond fund never matures. Unlike an individual bond or CD you can't be sure that you'll ever get all of your principle back on a specific date. You do get great diversification if you understand the type of bonds the fund invests in.

I personally use CDs or individual government insured/sponsored debt instruments for all my fixed income investing. I absolutely, positively want to know that a certain amount of cash will magically appear in my account on a given date. It hurts the yield I could get but it's also very secure.

I was burned many years ago in a bond fund that lost a substantial amount of its value when interest rates skyrocketed during the 1970's. I have a long memory and use my fixed dollar amount as my basic retirement plan. I don't want any risk there. Equities are intended to provide those nice extras like travel and gifting.

 

[SteveL]

2B has done a great job, to which I would add that both individual bonds and cd's are less liquid than bond funds. CD's are different than bonds in that the values don't vary as much.

 

[OAG]

2B has done a great job, to which I would add that both individual bonds and cd's are less liquid than bond funds. CD's are different than bonds in that the values don't vary as much.

Why do you say CD's are less liquid? Last time I checked I can redeem any CD I have on any business day. Yes, I will pay a penalty (the lenghth of which varies by instution), in virtually every case, of accrued or previously paid interest, but the principal, and interest that is not subject to penalty, is available.

 

[bobbee25]

I have a CD ladder but was thinking about adding a few of the corporate
bonds to increase my overall % rate.

 

[kyounge1956]

Why do you say CD's are less liquid? Last time I checked I can redeem any CD I have on any business day. Yes, I will pay a penalty (the lenghth of which varies by instution), in virtually every case, of accrued or previously paid interest, but the principal, and interest that is not subject to penalty, is available.

Bank of America also has (or at least had) CD's that have no early withdrawal penalty if the money is left in for more than five days. I used one of these two years ago to stash the money from a refinance while waiting for my car to be delivered. I don't know how the interest rates may compare to other CD's.