Being Defensive when investing in Corporate Bonds

I have a friend who claimed that he was investing in corporate bonds.  I asked him what bonds did he own? He said that he bought his bonds in the share builder's Plan and they were high yield bonds.  His statement was my first clue that he did not own Corporate Bonds. He had bond funds.

 

Many times, brokers and other people will pull a bait and switch on unsuspecting people. They tell customer that bonds are bond funds. This has been going on since the 1980s. Here is the reason why I started educating people on the difference between bonds and bond funds.

 

When interest rates decline, bond funds go up because the rates given by other investment keep pace with bond investments. That also means that the bond interest of the individual bonds go down. When interest rates go up, bond fund prices go down because bond interest rates go up.  Since it is a fund, the investment never matures. Here is why I stay away from bond funds. 

The beautiful Becky Quick dumped all of her bond funds. She explains her actions here. 

 

(Becky Quick), Rebecca ("Becky") Quick (born July 18, 1972) is an American television journalist/newscaster, co-anchorwoman of CNBC's financial news show Squawk Box. Quick is currently based at CNBC’s New Jersey headquarters.

 

I opened my first brokerage account when Becky was born.

 

Here is why I invest in Corporate Bonds. My interest is locked in. They mature on a date and I get my money, interest usually every 6 months and usually $1,000 on a date.

 

For example, I bought;

 

Cloud Peak Energy Resource LLC CPE SR NT has a coupon of 8.5% on $1,000 or $85 per year, that matures on Dec. 15, 2019. So if you bought this bond at $900.00, you will get $1,000 on the maturity date. If you bought the bond on December 15, 2015, you will receive $85.00 times 4 years or $340. That means on a $900 investment, you will get a $440 return. Your risk is Cloud Peak Energy Resources filing for chapter 11.      

    

Click on the link or on the picture.     

https://www.youtube.com/watch?v=I1PWBsUZvUE

 

CNBC's Becky Quick Dumps Bond Funds

 

Becky Abandon Ship

Becky got out of High Yield Bond Funds at the top of the Market.  Now interest rates are going up, bond funds are going down because of what I told you about the inverse actions of interest rates and bond prices. Bond funds become illiquid because everyone is running to the door at the same time and prices fall like a rock.

 

Read this article, " Could the Bond Market Be Transformed?" and you will see how Becky quick saved her 401K from destruction.

http://www.newsmax.com/Finance/Robert-Feinberg/Bank-Merrin-Newmark-El-Erian/2015/05/19/id/645469/

Could the Bond Market Be Transformed?

 

What am I doing about this?

As for me, I own the bonds. As interest rates go up, my bond prices go down. My interest that I get is locked in. But my bonds mature and I get $1,000 no matter if I paid $900 or $500 for them.  My only worry is the underlying company files for bankruptcy.