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What can we do for you?
- Identify the many Myths in the financial system, including the dream of “beating the market” through individual stock selection.
- Identify the key factors to becoming better do-it-yourself investors AND identify those which are under your control, such as an optimum allocation of your investments across appropriate asset categories.
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13391.86 |
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| Dow Jones |
12422.86 |
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| S&P500; |
1341.13 |
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| Dollar |
0.981 |
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| XIU.TO |
78.75 |
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| IVV |
133.45 |
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| EFA |
71.76 |
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| EEM |
134.48 |
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| XBB.TO |
29.11 |
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| AGG |
102.55 |
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| XSB.TO |
28.50 |
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| XRE.TO |
12.97 |
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| RWR |
71.01 |
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| RWX |
52.70 |
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Welcome to our site for the independent investor which was officially launched March 18, 2008. Become a member (it’s free) and enjoy full access to the site + receive on a preferred basis our newsletters. Our first newsletter commenting on TFSA's was emailed to members March 25. MEMBERS-PLEASE NOTE: Depending on your software and internet provider, it may be necessary for you to add
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Investing in Corporate Bonds – The Example of Bell Canada |
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The basic decisions which you must take when managing your investments are actually fairly limited. The most important one is perhaps the appropriate Asset Allocation for your portfolio (in general, see the section Returns – Asset Allocation) between shares or equity (see the section Equity – In General), fixed income securities (see the section Fixed Income – In General) and other asset categories (see the section Alternative Investments – General). Once this allocation has been determined, a secondar debt portion of the portfolio? It is often tempting to invest in corporate bonds in order to seek out a better return comparery question arises. In which securities should you invest the fixed income od to government bonds, but is this an appropriate decision for independent or “do it yourself investors”? A recent transaction involving Bell Canada indicates the risk in this strategy.
For several months, a bidding auction took place with respect to the shares of BCE Inc. (the parent company of Bell Canada). At the time this text was written, the offer of a financial consortium lead by the Ontario Teachers’ Pension Fund for the shares by BCE Inc. had been approved by the board of directors of BCE Inc. If the offer is ultimately accepted by the shareholders of BCE Inc., they will realize an interesting gain over the price at which the shares have traded in the last several years. However, this transaction does not only create winners. As part of these types of transactions, the target company is typically required to assume large amounts of debt borrowed by the acquirer to pay the purchase price. As a result, and in anticipation of the forced assumption by Bell Canada of such debt, the market for Bell Canada bonds literally fell apart. Thus, between March and July 2007, existing long-term bonds of Bell Canada (example: the bonds with a maturity of March 2035) lost 23.90% of their value (Source: Michel Girard, La Presse, 07 07 2007, page 10, section Affaires; see also a comment of Durocher d’Addenda 2007, doc. 812). What is the lesson one should draw from this collapse?
There is only one reason to prefer corporate bonds over government bonds: the better return that one is looking to realize, typically in the order of 1% per year compared to Canadian Federal Government Bonds (see the section Fixed Income – Diversification – The case for corporate bonds). On the other hand, there is a whole series of disadvantages. Here are the most important reasons (for more on this question, see the section Fixed Income – Diversification- Lessons from the USA of our site). Firstly, market liquidity for corporate bonds is less than that for Canadian government bonds. As a result of this reduced liquidity, commissions and transaction costs to purchase or sell corporate bonds are higher for an independent or self investor. Secondly, the documentation for corporate bonds is more complex and more difficult to understand, and often guarantees less protection to the holder in the event of transactions involving a change in control of the borrower, such as the one involving Bell Canada. Thirdly, the higher returns on corporate bonds can be explained by the fact that part of the return of the corporate bond is similar to that of the return on an equity investment. In other words, you are taking more risk by purchasing a corporate bond in order to receive a higher return over a government bond. Logically, an investor should reduce the fixed equity portion of his portfolio to take into account that corporate bonds are riskier to include in one’s portfolio than government bonds.
All of these negative factors leave us skeptical as to whether “do it yourself investors” should invest in corporate bonds. It is less costly, the documentation is simpler, and the management of your asset allocation is easier (for more, see the section Return – Asset Allocation of our site) if you choose to limit yourself to government bonds. And by doing so, you can leave to your neighbor the pleasant (!) task of explaining his recent loss in Bell Canada corporate bonds. |
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Last Updated ( Monday, 26 November 2007 )
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