Every investment has a probability of default – it has quantitative and qualitative components. If you are buying a bond – your first concern is usually quantitative “can this company or Government afford to repay me?”. In the case of a company – is it cash flow positive, is it solvent, what are the other and upcoming debt obligations, what is the financial and strategic position of the company? In the case of a government – how large are their deficits, how are the deficits being financed, what is happening to macroeconomic policy? Among a myriad of many other questions.

In an earlier article this year, I remarked that the paradox of bond prices rising as interest rates rise could be explained by falling credit spreads. So, today I want to delve a little bit more into the usefulness of credit spreads and their importance to bond investors.

What is a credit spread?

Everyone’s journey in life is different. We take different paths to achieving our goals and some paths may be more difficult than others. However, planning and preparation can help us to achieve our goals. A common goal shared among most, if not all people, is that of financial freedom. We all want to be able to live comfortably and afford the things that are important to us.

It is often quoted, “An investors worst enemy is not the market but his or her own emotions”. There are numerous theories which attempt to explain how investors react to regret or overreact when buying or selling their investments. Many times, their reasoning is based on the level of stress which leads to fear and excitement. This in turn leads to chasing performance and not diversifying, switching in and out of investments often at the wrong time, and feeling misplaced loyalty to a company, country, or region.

The most common signs of emotional investing.

A popular investment strategy for an investor seeking a predictable cash flow is bond laddering. Bond laddering is in essence building a portfolio of bonds with staggered maturity dates. For example, the portfolio can consist of bonds maturing in three, five, seven and ten years. You can think of each bond’s maturity as a different rung on the ladder.

There are always things happening to unnerve markets and cause volatility, from changes in commerce, to politics, to economic outcomes and corporate actions. Volatility is an investment term for when a market or security experiences swings in either direction, up or down, that deviate from the norm. If the price stays relatively stable, the security has low volatility. A highly volatile security hits new highs and lows quickly, moves erratically, and has rapid increases and dramatic falls.

It's widely known that the return you earn is a function of the risk you take. Higher risk equals higher return. Lower risk equals lower return. But what is high and what is low? How do we determine a high return vs. A low return? That is heavily influenced by prevailing market conditions.

One of the most overlooked features of a bond is a make-whole call provision but one can be forgiven for this because rarely does an issuer exercise this option. But however rare it is, it does happen. Just recently Macy’s (the famous retail store in the U.S) used this provision to early redeem its 8.375% 2025 secured bond on August 17^th. So, what is a make-whole call feature and how does it work and or differ from a standard call provision?

In the investment world, the terms credit, credit risk and credit quality are repeatedly used when speaking about different asset classes, investment types and issuers of debt. But what do these terms mean and how should they factor into our investment making decisions?

If you don’t know where you are going how will you get there? Many of us have an idea of where we want to be financially or a specific goal in mind we would like to achieve. However, if you start without a goal and then try to create a plan, there is a great probability you’ll get nowhere. First you must determine what your goal is, create timelines to get there, then plan your course of action? Many of us have goals we would like to fulfill; be it higher education, a new car, a first home or even a dream vacation.