Tuesday, 17 February 2009

Just how safe are bonds?

This is what the experts are doing with their bond exposures - increasing their provisions against losses.

Meanwhile, here's a strange headline: "Some junk bonds are safer than stocks".

Well, duh! In an insolvency situation, ALL junk bonds are safer than stocks. Whoever wrote the headline doesn't know much about stuff.

The article itself is an basic starter guide to where bonds sit in the capital structure. However, it doesn't mention a key point: that equity investing should be about buying into a growth story (because you get wiped out if anything goes wrong), whereas buying bonds is largely defensive.

1 comment:

hedgehog said...

This is from Graham and Dodd's " Security Analysis "
a safe bond for example is one which could suffer default only under exceptional and highly improbable circumstances. ........

It is true beyond dispute that Bonds as a whole enjoy a degree of safety distinctly superior to that of the average stock. But this advantage is not the result of any essential virtue of the Bond form; it follows from the circumstances that the typical American enterprise is financed with some honesty and intelligence and does not assume fixed obligations without a reasonable expectation of being able to meet them.

But it is not the obligation that creates the safety, nor is it the legal remedies of the Bondholder in the event of default. Safety depends upon and is measured entirely by the ability of the debtor corporation to meet its obligations.

The Bond of a business without assets or earning power would be every whit as valueless as the stock of such an enterprise.

note bold emphasis is mine .