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I have a rather simple question about corporate bonds… I’m really an options and futures trader (10 years) but as I get closer to my goals I have been buying corporate bonds here and there. Although I hadn’t bothered with them until very recently (last year or so), I did a lot of research (homework) and I do feel that I understand a lot about them and am pretty comfortable with them now except for something that would seem to be pretty simple – I haven’t come across a definitive answer as to what happens at maturity?
I’ve been buying quite a few of them, intensely diversified, at the rate of two a week for the last couple of months so I’ve accumulated a fairly extensive portfolio of them but the soonest any mature is still a year or more out.
It seems the coupon payments just magically land in my account and I even get a message from my broker about upcoming coupon payments but does the bond get automatically called away at maturity and replaced with the face value in cash or do I need to do something to manage them as they expire? I suspect that they do but is that ALWAYS the case without exception?
A number of them are pretty high yield so I am expecting a default at some point and I wonder how that usually plays out as well? (e.g. bond holders get priority over stock investors but I imagine it takes a while to sort it out if the company is entering Chapter 11)
Thanks for any and all insight.
Can you help answer these questions from other members on NexusFi?
The principal of standard corporate bonds is regularly paid back automatically at maturity.
Exceptions are - e.g. - special situations like covenant violations and/or defaults (as mentioned)
or special features which are relatively common among corporates. Such features can be very
complicated so that you will need the prospectus in order to decide if action is required; examples:
convertibility, callability, putability.
P.S.: Concerning defaults and your chances of saving (some of) your money, the respective prospectuses also give hints.
Important clauses are e.g. pari passu, negative pledge, cross-default and/or collective action.
Thanks. I did a lot of reading and study before purchasing any and it's surprising how I couldn't find anything that would give me a definitive answer about this but it turns out it is as I suspected.
Wish I had discovered them earlier (always felt bonds were boring) but there are lots of advantages. I'm working towards eventually converting my entire portfolio to fixed income so I can go sailing and not worry about it
I'm not sure if this is an ideal point in time to switch into corporate debt, but concerning performance
corporates are very attractive, indeed ... as long as you keep in mind that defaults make or break that
performance; and recovery rates are notoriously poor. In other words: For most corporates the risk
adjusted return isn't a bargain.
The following reports and analytics aren't bargains either, but depending on the size of your portfolio
(for sailing only you will need some size and diversification ) the following links might be interesting
which institutions use for risk gauging and meeting the regulatory requirements:
Plan A. Live off the income from a mostly fixed income portfolio (of which a bond ladder is only one part) without drawing down on the principal at all.
Plan B. If all else fails, draw down only much as absolutely necessary because I still won't live long enough to run out and can't take it with me.
Thanks for the pointer to the analytics, your very right, not a "bargain"
) the following links might be interesting