Question

In: Economics

Over the last few years, investors, especially older investors, have been forced to look for ways...

Over the last few years, investors, especially older investors, have been forced to look for ways to squeeze additional income from their investment portfolios. Investing in bonds is one way to do this.

Do you think investing in corporate bonds is a good way to increase income? Why or why not?

What factors determine bond yields, both corporate and government?

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Expert Solution

In my personal opinion investment in equity share is the best way to generate wealth. Warren Buffett, world's 4th richest person earned huge portion of wealth from stock market investment. But stock market investment need patience. That is why long term, i mean more than 10 years portfolios are in green and short term portfolios in red. In the case of old investors, investment in debt securities is better. It reduces risk and ensure better return than bank deposit. So corporate bond is a best way to increase income.

My justifications

1. Corporate bonds are les risky than shares or real estate.

2. Providing high interest rate than government bonds.

3. Legal validity.

4. Can be used as collateral security for loan.

Factors determine bond yield.

1. Interest rate - Rate of interest is the most important factor of bond . Bond with higher interest rate provide high yield.

Time of maturity - Yield of long term bond will be higher than short term bonds.

2. Future interest rate expectation - If there is a chance for increase in interest rate price of bond will decrease and yield increase.

Future inflation expectation - If there is a chance for increase in inflation, bond yield will increase and bond price will decrease.

3. Money supply in the economy - Bond gives high yield when money supply is high.

4. Credit quality of the issuer - High yield can be expected from companies with better credit quality.

Rahul Sunny answered 6 months ago
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