Choosing Between Junk or High-Yield Bonds

Bonds are issued by private and public entities that need long- and short-term financing. Bonds come in a large variety, with different terms, interest rates, and issuers.

Junk or high-yield bonds offer a high rate of return but are considered a risky investment instrument. High-yield bonds have a low credit rating and are assessed based on different factors such as industry or sector, financial holdings, and others. According to some finance experts, junk bonds are a valuable instrument because they supply capital to start-ups and struggling companies. There are other types of bonds such as book entry, build America, convertible, and others. Some people invest in zero-coupon bonds to supplement their income. War bonds are another variety and are issued by national governments that seek to fund wars. Government agencies, financial institutions, and corporations also issue foreign currency bonds that are denominated in other currencies. Other investment products include perpetual and covered bonds and asset-backed securities. Perpetual bonds are different from other instruments in that they have no maturity. While perpetual bonds offer a steady stream of revenue, treasury bonds are the safest investment instrument. There are also mortgage-backed and asset-backed securities as well as collateralized debt and mortgage obligations .

Investors can choose from different types of products such as bearer, lottery, municipal, and treasury bonds. They are a safe investment instrument offered by local governments. Some bonds are insured while others are not, but all of them are tax-free. Municipal bonds come with a lower interest rate than certificates of deposits and treasury bills. This is a type of long-term security that comes with a floating or fixed interest rate. Zero coupon bonds are one option for prudent investors. Bonds are a preferred investment instrument of those who are looking for steady flow of retirement income. Individuals with short-term savings goals usually choose other, riskier investments. Issues that are insured are practically risk-free. Bonds are in the form of low-interest loans that come with transaction fees of 0.5 to 3 percent. The main problem is that municipal bonds offer lower returns than stocks.

Sovereign states also offer products in foreign currencies. Foreign currency bonds have nicknames such as Samurai and Yankee. Bonds can be divided into fixed rate and floating rate instruments. Products differ when it comes to yield-to-call, credit quality, and other parameters. Issuers offer products with different market price, principal, put and call dates, etc. Those who seek to invest their money over a short period usually opt for fixed rate bonds with a term of 1 year.

References: 

Canada Banks

Bloomberg

Should You Choose Stocks Or Bonds in Investing

As a Canadian, should you invest mostly in bonds or in stocks? Should you invest everything in just stocks or just bonds? This is a difficult question when it comes to investing. Experts advise that you should invest a minimum amount in bonds, with stocks being a main part of your portfolio. It is always best to have a bit of both than to put all your eggs into one basket. Portfolio diversification is a major consideration when investing.

From this perspective, the amount you invest and the type of investment instruments you include in your portfolio depend on the risk you are willing to take as well as on your individual circumstances. If you are risk-averse, you should not make risky investments. In addition, if you do not have enough cash, it is best not to invest. Persons prone to anxiety and panic attacks should not take excessive risks as well. Regardless of what you decide to invest in, protecting the bare minimum is important - this is the money you will need post retirement. You can invest the money that is above and beyond this.

If you choose to invest your money in bonds, opt for ones with a term of no more than five years. Toronto municipal bonds featured with longer terms entail more risk, and they may lose value more easily.

Among the factors underlying the decision how much to invest and what in are your minimum required monthly income, taxes, expected pension benefits, and the equity you will have in your home when you retire. You should not expect growth in value - use the current market information.

How do you calculate expected returns on Canadian bonds? You should take inflation and the interest rate into account. If inflation is 3 percent while the interest rate is set at 6 percent, your return will be 3 percent (simply subtract the second from the first.

As for stocks, you need to ask yourself how much money you can really afford to lose. Then multiply this amount by two. You should never invest more than that in stocks. The risk is higher with stocks, but so are the purported gains. With bonds, returns are between 3 and 4 percent, while with stocks, these can be five times higher. Yet, you may lose as well win. Finally, in times of market instability, it is not important what you choose to invest in, right?

Investing in residential real estate is an alternative to investing in stocks and bonds. Investing in real estate is in fact a major investment instrument. Home owners mostly buy property as their primary residence. It should be noted, however, that owners do not always have the full purchase price of the property they buy, and financial companies extend loans for the purchase. In comparison to other types of real estate, residential real estate carries the lowest risk. This useful guide to Canadian bonds has detailed information on penny stocks.