What are the downsides of investing in fixed interest corporate bonds such as Emirates 4.5% XS0885065887?

06 July 2022

Question by Dave

What are the downsides of investing in fixed interest corporate bonds such as Emirates 4.5% XS0885065887?
Thanks
Dave


Answered by Boring Money

Hi Dave,

Investing directly in fixed-interest corporate bonds is similar to holding company shares directly; you are putting all of your eggs in one basket. The big difference between fixed interest holdings and shareholdings in single companies is that if the company fails, as a fixed interest investor you are a creditor to the business so you may get some of your money back. Shareholders get nothing if the company fails.

Another disadvantage of holding fixed interest issuances directly is that you are locked into the interest rate offered and have to wait until the bond matures before you get your original investment back. If you wish to get a better return or want your capital back you have to sell your bond on the market and may find the price has gone down (which has been happening as interest rates rise).

The alternative is to buy a fixed interest fund which pools investors' money and will invest in a broad spread of corporate bonds. This spreads the risk and ensures you are always accessing new bond issues at prevailing market interest rates. The value of your investment can still fall but that risk can be managed by investing in funds that hold fixed interest securities of different maturity dates (ultra-short, short, medium and long-term) or credit worthiness. The shorter the term the less sensitive they are to interest rate movements but also the lower the interest rate yields available. The lower the credit worthiness the higher the yield offered (to compensate for the risk).

Finally, if you are comparing fixed interest securities to shares, you would expect a lower long-term return for bonds but without the same volatility (for the reason mentioned above).

I hope this helps.

Andrew

Answered by

Boring Money