Corporate Debt: The Good, The Bad, and The Ugly

    Every day, trillions of dollars of corporate debt securities trade hands on the corporate debt market.  These transactions and the sales of corporate debt help finance mergers, acquisitions, corporate growth and expansion plans, as well as general operating expenditures.

    Millionaires are made every day with corporate debt, and many businesses rely on the corporate debt market as a sole method of funding.

    The Good

    There are two ways for a business to raise money: by selling an equity position (ownership) or selling corporate debt securities and temporarily borrowing needed capital.  The shining light to corporate debt is that it allows a business to expand without giving up any ownership position.  Companies routinely issue corporate bonds rather than deal with banks to avoid any change of ownership.  By purchasing a bond, you may be helping to keep a shareholder as a shareholder, and you'll likely be compensated very well in the process.

    The Bad

    Where stocks and other investments are only minutely affected by changes in monetary and fiscal policy from governments and central banks, the corporate debt market is perhaps the most affected.  Minute changes in the discount rate, which is the rate the Federal Reserve charges other banks, greatly influences the yield, and consequentially, the price of every bond on the corporate debt market.

    Investment banks, which do very little retail or commercial lending to citizens but instead invest in the financial markets to make a profit, are some of the most active corporate debt traders.  Like other banks, investment banks have access to the discount window at the Federal Reserve, whereby they can borrow cheaply and then lend to other companies at higher rates, creating a problem.  Since they are directly connected to the Federal Reserve, any increases or decreases in rate policy means an instant move by investment banks into or out of corporate bonds – and usually to an extreme degree.

    The Ugly

    Corporate debt has a far larger learning curve than most expect.  Where stocks are usually evaluated and priced on the strength of a business, bonds earn their price from literally hundreds of micro and macroeconomic factors.  This should not be discouraging, however, as a number of professionals have opened corporate debt bond funds as a means to bring ordinary investors into the corporate debt markets.

    Corporate debt, when compared to other investment vehicles, requires a much larger pool of capital to create a diversified portfolio.  Where $1000 might buy up to 100 shares of stock in different companies, bonds are sold in $1000 increments only.

    The best way to circumvent this technicality is to invest in corporate bonds with the use of a corporate bonds fund.  Similar to a stock mutual fund, corporate bond funds hold a diversified portfolio of bonds and allow investments of only a few hundred dollars, giving you diversification without breaking the bank.

    A Middle Range Investment

    Corporate bonds are a great way to build a bridge between ultra safe investments like Treasuries and riskier investments like stocks.  Over time, corporate bond debt has proven to be one of the most lucrative debt investments, and it will likely be for decades more.
    Tim Ord
    Ord Oracle

    Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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