Quote Originally Posted by Alan3285 View Post
Also, if a company does go bust, bond holders are more likely to get something back than equity holders, although how much more likely is another matter.
Bond holders will get money back after the banks have been paid back and after outstanding wages have been paid to workers out of a job.

The idea that bondholders will be paid out ahead of shareholders if things go pear shaped has long been touted as a reason for going into bonds if you as an investor are less tolerant for risk. However, as you hint Alan - in practice - I can't think of a single example in the history of the New Zealand market where shareholders lost everything and bondholders *did not* lose huge amounts of capital. Those same hapless bondholders then spent years getting drip fed only a fraction of the original capital they invested, while writing off all of the interest they thought they were due while waiting.

In New Zealand, unlike in the United States, we have lots of high yielding shares to invest in. Many of these pay annual dividends at a gross yield similar to the corporate bond rates. In fact some of these shares are the same companies that also market their own corporate bonds, the very same bonds we are talking about. The associated shares are of course volatile. But that volatility includes upside risk as well as downside risk. By contrast the drawdown downside potential on a bond (through company failure) is much higher than any capital upside risk. Indeed if you buy a bond in a new issue and hold until maturity, there is almost always no upside risk at all.

For this reason I no longer hold any company bonds in New Zealand listed companies or indeed finance companies. Instead I buy high yielding shares to fulfill the 'income' part of my investment portfolio. And if I want a genuine fixed interest product I am quite happy to put my money safely in a term deposit in the bank.

SNOOPY