Question

What are the pros and cons of buying bonds issued by major listed companies?

Answer 1

The pros of buying bonds issued by major listed companies

· The corporate bonds pay a fixed amount of money to its investors so it is considered as secure income investment.

· It gets preference in payments over the common stocks and preferred stock as the common stocks have residual claim on the profit of the company and they have claim on the profit of the company after paying all other liabilities.

· The higher rating of the company’s corporate bonds suggests that the company is financially sound and investing in its bonds bear minimum risk.

· The risk-averse investors prefer these kinds of investments.

The cons of buying bonds issued by major listed companies                                     

· Bonds holders do not have voting rights in the company.

· The earning potentials of the bonds are limited as the residual profit of the firm is distributed among common shareholders.

· As per risk and rewards principal, the investors get lower interest rate if rating of the bond is high.

· Investments in bonds are exposed to various kind of risk like interest rate risk, credit risk, default risk, maturity risk, liquidity risk etc.

· Corporate bonds with coupon are exposed to reinvestment risk because cash flows (coupon payments) are invested at rates that can differ from the initial YTM.