Corporate bonds are loans to companies in return for a fixed rate of interest (coupon payments) and the return of capital on the maturity (redemption) date. We use fixed income securities as an income generator and a risk diversifier. With a corporate bond there is a risk of default, which is measured by a credit rating awarded by a number of rating agencies. For investment grade bonds the credit rating will range from “AAA” (the highest) to “BBB” (the lowest). Our concentration is on “A”-rated corporate bonds. Any income securities below investment grade are ignored, as they are deemed too risky. The bonds are selected on our expectations of interest-rate moves along the yield curve, a chart consisting of the yields of bonds of the same quality but different maturities. Potential investments are identified using credit analysis research and from their position on the yield curve.
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Five year percentage change in Sterling Liquid Corporate Bonds, source Bloomberg.