Discussion and 1 reply

 Choose one of the following topics to present to your peers in a professional analysis using a minimum of 350 words. 

 

1. What are risks associated with investing in bonds as a long-term investment? Why would bonds/bond mutual fund be used within an investment portfolio and how might such an investment impact an investor?

 Your critical response should have a minimum of two sources published in the last 12 months which should be used to support the content within the postings, proper in-text citations.  Your responses should be professionally written and correctly formatted references should be prepared consistent with the APA. The list of references should be physically positioned at the end of the postings. 

Post by classmate 

 

The valuation of bonds may vary depending on what type of bond you choose to invest in. For example, if you choose to invest in a corporate bond A bond typically pays interest on a regular schedule, usually semi-annually, though sometimes quarterly or even annually. A bond’s payment is called a coupon, and the coupon will not change except as detailed at the outset in the terms of the bond. A fixed-rate bond might offer a 4 percent coupon, for example, meaning it will pay $40 annually for every $1,000 in face value. ( Royal) In most recent years we have seen banks default adding additional risk concerns. Rising interest rates reduce the fair value of bank bond investments. The accounting for HTM investment can mask this devaluation impact of rising interest rates since HTM unrealized losses are only disclosed and not included in the measurement of the investment. As a result, in the case of SVB, significant portions of bank capital were an illusion, making traditional liquidity and capital ratios falsely appear favorable. According to SEC filings, banks incurred significant unrealized losses on their HTM bond investments at the end of 2022 compared with a year earlier, and SVB effectively had zero equity compared with two other banks that effectively had 20% lower equity. (Mishler)

Bonds are the stabilizer of a portfolio. They minimize risk and don’t have the ups and downs of stocks. Bonds in a portfolio context, are conservative and provide capital for the rest of your portfolio, basically a solid base to work off.

Overall bonds can be a vital part of a portfolio and can be appealing when interest rates are high and you can earn relatively good returns. But every type of investment has benefits and risks, and bonds are no different. Being a successful investor comes down to understanding the pros and cons and finding investments that align with your risk tolerance and goals.

Mishler, Mark. CPA. Journal of Accountancy. Identifying and analyzing the risks of ‘risk-free’ securities. September 1, 2023. Retrieved from: https://www.journalofaccountancy.com/issues/2023/sep/identifying-and-analyzing-the-risks-of-risk-free-securities.html

Royal, James. PhD. Bankrate, April 18, 2024. Retrieved from: https://www.bankrate.com/investing/corporate-bonds/#why-you-might-like-bond-etfs-instead-of-bonds