Bonds should be a vital component of a diversified securities portfolio
In the event of a default, the holders can have these assets attached and sold to recover their investment. However, in the case of unsecured debt, the investor can only hope that the issuer will have adequate solvency and liquidity when the time comes for repayment.
Interest from a bond is independent of the profits made by the issuer and is usually set right at the outset. Even in the case of ‘floating-rate’ bonds, where the coupon is linked to a benchmark, such as Libor, once the interest is fixed at the start of the period to which it applies, it is not a function of future profitability. This is why bonds are referred to as ‘fixed income’ securities.
Bonds may be negotiable or non-negotiable. Shares are negotiable for we can always buy and sell from fellow investors. However, certain investments are non-negotiable. Bank FDs held by retail investors cannot be endorsed by one party in favour of another and, consequently, represent non-negotiable investments. Similarly, if we were to acquire a National Savings Certificate from a post office, we cannot sell it to another party prior to maturity.
The psychology of bond traders is usually different from that of stocktraders. While most investors in stockmarkets periodically trade, many investors in bonds are content to hold the securities until maturity and collect periodic coupon payments. In practice, when a bond is newly issued, there is active trading. After a while, however, most holders choose not to play an active role in the
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