Other kinds of bonds you may come across

The three bond types discussed in the previous parts of this corporate bond series are the main ones you need to know about in order to follow discussion in the papers, or to understand this series on Monevator.

However you will find other ‘bonds’ or related terms being bandied about from time to time.

I’ll quickly run through some of the most common.

Government bonds / treasuries (US) / gilts (UK)

These are bonds, but they’re not corporate bonds. They are issued by governments and are far more secure than corporate bonds, at least in the case of stable Western democracies. As such, they are very useful assets to own at certain times. The bad news is the interest rate they pay is usually low (especially in December 2008). I’ll properly cover government bonds in a different article.

Debentures

These are bonds issued without any form of asset backing. They are not really a separate category of corporate bonds – most corporate bonds and government bonds are debentures.

Secured corporate bonds

Rather than issuing against their own creditworthiness, companies can secure a bond against assets such as plants and machinery. These are known as secured corporate bonds. They are as I understand it rarely held by private investors. I have no experience with them at all, so won’t comment further.

Municipals

Municipals (also known as munis) are issued by cities in the US. Local authorities in the UK sometimes issue something similar under different guises, such as ‘yearlings’. Municipals are considered safer than corporate bonds but less safe than true government bonds. I have no experience of them, but I have experience of inefficient local government and I question what advantage they have over government bonds. They’re definitely not an essential asset class.

Guaranteed equity ‘bonds’

These aren’t true bonds at all. Rather they are equity-based vehicles that promise to give you some of the gains from a specific stock market, provided some other downside criteria isn’t breached. Often they promise to return all your capital. That may all sound good, but these investments are in my view totally opaque and uncompetitive and I’d avoid them. In any event, they are not proper bonds; the word ‘bond’ is just being used to convey security.

Savings ‘bonds’

Sometimes banks will offer a fixed rate of interest in a ‘savings’ bond. About a year ago there were loads of banks offer savings bonds of 6-7%, which would have been a good place to park your money in hindsight. Anyway, from an investment point of view they’re not bonds at all – they aren’t traded, and your capital is safe unless the bank goes bust. Really, they are no-access savings accounts. You get a fixed interest rate in return for locking away your money for some specified time.

Compulsory convertible debentures, and so on, and so on

There are loads of different variations in corporate bonds, with convoluted names. The main thing to remember is they were cooked up by a company as the cheapest way for it to secure your money, not as the best way to give you a good investment. All the complication will seldom be worth much extra return.

I’m not saying no exotic corporate bonds are ever worth buying, but rather that understanding what and when one is a good buy is a job for the specialists.

Sometimes a writer or pundit will tout some particular “can’t lose” bond investment. Be very careful. You can always lose money!

The next part in this series will look at how corporate bonds compare to equities as an investment. Pop your email in the box below or subscribe via RSS to make sure you catch it.

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