INVESTMENT
Anyone considering investing in bonds can gauge how ‘safe’ the borrower is by looking at its credit rating"
income payments that will be made by the borrower. Once a bond is launched, if it is listed, it can be traded on a secondary market, such as the London Stock Exchange, just like a share in a company. Usually, the larger – or ‘safer’ in the eyes of investors – the organisation is, the more likely it is considered to be able to pay the loan back, and in return the more money it will be able to borrow at a lower interest rate. Rating guide Anyone considering investing in bonds can gauge how ‘safe’ the borrower is by looking at its credit rating. These range from AAA rating – held by just a few nations, including Australia and Canada and organisations including the University of Cambridge – down to D rating. Anything below BB is considered high-yield or a ‘junk’ bond. This means sovereign bonds – for instance, those linked to highly developed countries in the G7 – are unlikely to provide a high level of return, but repayment is virtually guaranteed. However, companies that issue bonds – which are known as corporate debt –
often have to pay higher interest rates to investors, even if they have a rock-solid credit rating. This is because they are reliant on generating profits to pay bondholders back. Although the majority of corporate debt is repaid, the asset class still carries risk. Companies can miss payments to investors, as retailer House of Fraser did twice in 2018, or find themselves in a situation where they have to restructure their debt. PizzaExpress, one of the UK’s oldest dining chains, faced pressure in 2019 to restructure its debt as trading conditions on the high street lumped pressure on the company. Restructuring may include agreeing a lower interest rate repayment with bondholders.
Inflation is also the enemy of bonds.
Because bond payments are fixed, any rise in prices means the real return from bonds (the return after inflation) reduces. If a bond matures in one year, this is a short-term issue. But for an investor in a ten-year bond, rising inflation could gradually erode the bond’s real returns as the years pass by. Some issuers do, however, offer inflation-protected bonds that have variable or ‘floating’ interest rates. Investors are compensated for the risk they take with their investments. This is reflected in the price they pay. The lower the interest rate – or yield – on a bond, the more expensive it is and vice versa: with a higher interest rate (meaning the bond is viewed as more ‘risky’) the price falls. Cambridge bond opportunities The bonds on offer from Cambridge- related businesses and organisations also offer varying degrees of risk and reward. The University of Cambridge, one of the world’s most prestigious academic institutions, has bonds that trade on the London Stock Exchange. This means anyone can
$19 trn The amount of money owed by companies (across eight major economies including the UK), which cannot cover bond interest payments with profits
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