GROW NET WORTH BEYOND YOUR COMPANY'S REVENUEBonds For Business
Use Fixed Income Strategies to Develop a Long-Term Business Plan
Running a successful business requires investment in employees, capital, and the future. A diversified investment portfolio presents the opportunity to plan for tomorrow by putting your money to work today. A strategic approach to bonds gives you more control over the scheduled payout of your investments, letting you plan for expenses down the road, with lower risk factors than many other financial instruments.
What Is a Bond?
Bonds are like an IOU offered by a variety of different sources. They are commonly purchased to preserve the principal invested, be a source of predictable income, and/or be a way to reduce the overall risk in a portfolio. Bonds are sold at a set interest rate and maturity date, though some can be called early. Typically, when interest rates fall, bond values increase, and vice versa.
The most common taxable bonds are from the Treasury Department and other government agencies. These bonds are low interest and lower risk, backed by the federal government or government sponsored agencies like TVA, Fannie Mae, and Freddie Mac to name a few. Typically not callable, these bonds will be paid at their maturity date, and the interest on most is exempt from state and local taxes.
More municipal bonds are available than stocks on the open market, but they are generally illiquid before maturity which makes them less frequently traded. Municipalities will sell these bonds when capital is needed to fund projects that require more than taxes will support. There are many different types of municipal bonds with different repayment strategies, so let our financial advisors guide you to the appropriate choices based on your needs.
Issued by foreign and U.S. companies, corporate bonds are typically unsecured, carrying higher risk and higher yields. Corporate bonds are affected by interest rates, the credit ratings of the companies issuing them, and other factors, but are more liquid and more flexible (short-, medium-, long-term) than taxable or municipal bonds.
How to Make Bonds Work for Your Business
Bonds provide a rather unique investment opportunity in that they are more predictable than other options. Due to the preset interest rate and date of maturity, bonds can be utilized to plan future projects and purchases for your business. Bonds are a great way to save excess capital in a lower risk investment that will be available to you on a specified date. Keep in mind that they are less liquid than other options should you need to access that capital before the bond matures.
There are many ways to set up your bond portfolio, and we will partner with you to determine what is best for your business. The list below shows just a few different methods and their associated benefits.
A commonly used strategy, laddering invests in bonds of different maturity dates to mitigate risk, while maximizing flexibility and long-term benefits. Different approaches may be taken to laddering, depending on the needs of your business.
- Barbells: Investing more heavily in short-term bonds to take advantage of lower risk options for near future needs, and long-term to benefit from higher yields.
- Regular Income: Interest on bonds is generally paid twice per year. By purchasing bonds with different payment months, you can create a regular stream of income from the maturity of your investments.
- Systematic Investing: By investing in funds on a regular basis, this strategy takes advantages of varying interest rates and offering a mix of returns.
A fund manager selects which bonds and when to purchase them in a bond fund. This strategy is highly diversified, but offers less control to the investor. Bond funds are subject to more risk than individual bonds, but offer greater liquidity as shares can be sold at any time.
Investors should consider the investment objectives, risks, charges and expenses of an investment company carefully before investing. The prospectus contains this and other information and should be read carefully before investing. The prospectus is available from your investment professional.
Sold at a higher value than their counterparts, premium bonds pay a higher coupon rate than the market at time of purchase. This added value has historically made premium bonds more stable when interest rates fluctuate. In addition, premium bonds tend to have a higher yield than non-premium options.
A bond swap is the use of funds from the sale of one bond in order to purchase another. Bond swaps are generally performed to maximize a portfolio based on the current market, or anticipated change. A swap may be made to increase or decrease the time to maturity of a bond, hedge against or take advantage of expected changes in the interest rate, move to a different industry segment, or even to lower taxes.
Why Invest in Bonds?
In low interest rate markets, like today, bonds offer a higher yield than other low-risk savings options. By investing in bonds now, you can put capital aside for your future needs, while enhancing your profits at maturity.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value, barring default or an early call at the issuer’s option. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise.