Course: Investment Planning
Lesson 9: Fixed Income Securities
Just a question about Corporate Bond Funds. Gathering my information from the book, it seems they are “debt notes” insured to keep the company going. If they are not repaid the person who accepted the “bonds” can sometimes take assets in the company, like equipment as repayment for the “debt note” aka “bond”
So my question is basically, there is a Market for this type of thing? Corporate Bond Funds are illiquid, right? Because it’s not cash to begin with & no one is able to take it out as cash. Do I have that right?
A liquid asset is one that can be converted into cash quickly (less than one year) without risk of loss in value. Your conclusion is correct that corporate bond funds are generally illiquid. Bond funds comprised of publicly traded bonds are marketable because they can be sold quickly but there is a chance of loss. Bond prices in the secondary (public) market are inversely related to changes in interest rates. When rates go up, the market value of bonds tends to fall. In addition, if a corporate bond issuer’s credit rating is degraded, the price of their bonds in the secondary market could also fall.
Even if the bonds are collateralized by assets, there is no guarantee that the assets would fully pay off bondholders in the event of an issuer’s default. In addition, the process of suing the bondholder for the collateral could extend beyond one year.
Onward and Upward,