Invest in Bonds

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Bond Description

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Yield and Spread

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It’s coupon rate is fixed at 11.625%, which is much higher than other corporate bonds. The current yield of this bond is 9.817%. As we assumed, the U.S. Federal Reserve will continue to raise interest rates in the next two years, here we also suppose the interest rate increases by different levels in two years from now. The coupon payment is $58.13 for this bond and is paid semi-annually. To estimate the future value of our reinvested coupons, we use the assumed yield to compound and get below numbers:

FV of Reinvestment

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Finally, summing up the future value of coupon reinvestment and the bond price, we get the bonds’ total future value and the correlated HPR:

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Through this investment strategy, people are still exposed to inflation risks as well as interest-rate risk because of fixed coupon rate. Besides, because of the high yield, this corporation bond is facing higher default risk compared with others that have greater bond ratings.

However, just like the floating-rate bond, this high yield bond is not exposed to the reinvestment risk neither due to increased interest rates. Here we also do not need to worry about the exchange-rate as this bond is traded in U.S. dollar and Hong Kong dollar has a fixed exchange rate with U.S. dollar. What’s more, we are not exposed to liquidity risk or call risk as we prepare to hold this bullet bond to maturity.

Except these two strategies, there are still some other ways we can use to make profit under this assumed economic condition. For example, we can short-selling bond as we believe the bond price may decrease as a respond to the increased interest rate, so we hope to borrow it from others and sell it in the market in the usual way. At some stage, we buy it back at a lower price to return and make profit from this process. Besides, we can also use hedge strategies like short futures contracts or long put options. Different strategies have different risks, so what we should do to meet our investment need are to decide what kinds of risks we can suffer and to what extends. As for conservative investors, the best way is to minimize the bond’s risk level, correspondingly forgive potential returns. Conversely, aggressive investors can try to make higher returns as long as getting ready for the probability of capital loss.