As interest rates change, the prices of bonds will fluctuate. If interest rates go down, everything else being equal, the price of your bond will go up. That's because the coupon is fixed.
For the rate of interest to change, the bond price must change.
Likewise, if interest rates go up, the prices of bonds will go down – at least, temporarily.
But if you hold your bonds to maturity (when the principal is repaid), then these changes in price can be meaningless. You're still going to be paid back $1,000 per bond.
Assuming you're happy with the nominal coupon, there's nothing to worry about.
That's a lot safer than owning stocks. As you know, stock prices bounce around for no apparent reason all the time…
Stocks can also be hard to value... which means it's possible to pay way too much for them when you buy, and it's possible to sell them for far less than they're worth.
A stock's dividend is also never guaranteed.
CEOs can cancel or decrease dividends at the drop of a hat. As an equity holder, you’re entirely at the mercy of someone who may not have your best interests at heart.
Bondholders don't have to worry about their coupon payments being lowered. The coupon is legally required to be paid. Companies have to meet that obligation, or else the bondholders are entitled to certain underlying collateral.
If they fail to meet their obligations, it’s likely because the business is going bankrupt.
But even then, as the bond holder, you can partially recoup your investment as the courts will force the company to pay its debts.
Typically, this involves selling off underlying assets such as equipment, property, land, intellectual property, along with everything and anything else that can be auctioned off for cash.
As the bond holder, you are entitled to this money.
It won’t be enough to cover your entire investment, but it’s better than a kick in the teeth with bond holders seeing an average of 40 cents on the dollars.
But equity holders... they do get kicked in the teeth.
This legal protection is just another one of the many reasons we love bonds at Porter & Co. and why they’ve long been Porter’s favorite way to maximize his investment returns while reducing risk.
Before you invest in bonds, however, it’s important that you fully understand how the market functions…