Discussion

Discussion 8

Bonds are typically thought of as low-risk investments. However, there are so many different bonds that they actually span practically the whole risk spectrum. Start a new thread for each type of bond that you can identify and discuss its characteristics and relative risk/return level. At the end of the week, try to agree on ranking the bonds in terms of risk/return in a separate thread.

Reply two postings and add your own points of view and new information.

Posting 1

Corporate bonds

It is essential to understand that bonds and stock represent two ways in which an entity can raise money for its operations, and they have a clear distinction between them. When a company issues stock, it sells a portion of itself to the investors in exchange for money. Investors become entitled to ownership of the company, meaning that they share company profits or losses. Returns for the stock can only be earned through dividends when issued by the company. On the contrary, Bonds represent a debt. An entity that needs to raise money borrows money from the public by issuing bonds. Investors who invest in such bonds receive coupons or interest paid out on a semi-annually basis and the principal amount when the bond matures. Although bonds are not compelling for a long-term return like stocks, some investors prefer them since they are less risky compared to stock.

Posting 2

Mortgage backed bonds

I feel like we cannot talk about mortgage backed bonds without mentioning the mortgage crisis that more or less triggered the Great Recession in 2007. Something Professor talked about in his modules is how the rating agencies of Moody's, Standard and Poor, and Fitch rate bonds. Part of the issue is that these agencies were inaccurately labeling risky mortgages stuffed into CD's as AAA when they were in fact much riskier. Furthermore, homeowners were able to purchase mortgages with little or no documentation proving they would be able to pay them off. Finally, homeowners got greedy and many of them refinanced or took out second mortgages to finance homes they could not afford. While everything was seemingly going well, a giant bubble was forming and when it collapses...we all know what happened next.