Corporate Bond Investing Tips and Information

Where can I buy corporate bonds online?

Corporate bond investors can buy corporate bonds online from a number of online brokers, including Fidelity Investments and E*TRADE Financial.  While BondSavvy is not affiliated with either company, our founder Steve Shaw has led investor education webinars for both companies, including: 
  • August 6, 2019: Steve led a bond investing webinar on Fidelity titled "Rethinking Bond Investing," which you can view here
  • May 17, 2018: Steve led a bond investing webinar for Fidelity customers titled "The Case for Active Bond Investing"
  • November 6, 2018: Steve presented 'Active Corporate Bond Investing' to E*TRADE customers. Click here to watch a recording of this bond investing webcast.
There are many advantages to investing in corporate bonds online, including:

1) See the largest amount of corporate bond inventory
2) Pay the lowest fees
3) Enjoy fast and efficient trade execution

We will discuss each of these points in turn.

See the largest amount of corporate bond inventory
Online brokerages create a competitive market for your corporate bond investments by aggregating bid-offer quotes from over 100 dealers.  Typically, for each corporate bond available on an online brokerage, there will be five to ten dealers providing live-and-executable bid-offer quotes.  The below example shows a depth of book for the Verizon 3.85% 11/1/42 bond (CUSIP 92343VBG8) available on  

* Depth of book show on at 1:55pm EDT on March 13, 2019.

In this case, six dealers provided live bid quotes and eight dealers provided offer quotes.  This is typical for both investment-grade corporate bonds and high-yield corporate bonds.  This is a far cry from the way the bond market worked decades ago, as, corporate bonds today trade in a competitive marketplace with typically reasonably narrow bid-offer spreads.

In the Verizon '42 case, the bond was quoted with a bid-offer spread of 0.65 points, on a dollar-price basis, and 0.047 percentage points (or 4.7 basis points) on a yield-to-maturity basis.  Bid-offer spreads for corporate bond investments can vary based on the maturity of the bond, how actively the bond trades, and the number of dealers providing bond price bid-offer quotes.  Bonds with a long time to maturity, such as the Verizon '42 bond, will often have wider bid-offer spreads on a dollar-price basis.  The reason for this is bonds with a longer time to maturity are more sensitive to changes in interest rates since changes in rates will impact the bondholder for a longer period of time than they do for investors in shorter-term bonds.     

Do all brokerages show customers competitive quotes?
Most online brokerages differ from traditional brokerages, as traditional brokerages often do not enable customers to see all of the quotes provided by third-party dealers (aka "Street Inventory").  They, instead, often only show customers bonds their trading desks are quoting.  As a result, it is often the case these customers see less bond inventory at worse prices since they do not enjoy the benefit of competitive bond price quotes.

Pay the lowest bond trading fees
If a Fidelity customer was to purchase the above Verizon company bond at a price of 92.303, Fidelity would 'mark up' the bond by 0.1 points, which is equivalent to $1 per $1,000 face value of bonds.  Since bonds are quoted as a percentage of their face value, a bond price quote of 92.303 means the value of the bond is $923.03.  With the $1 mark-up, the customer would pay $924.03 for each bond plus interest that has accrued on the bond from the last coupon payment date.

These fees are in sharp contrast to fees charged by traditional brokerages, which often charge a two-point markup for each bond.  For example, that same bond quoted at 92.303 would be shown to a customer of a traditional brokerage at 94.303.  This fee is equivalent to $20 per bond, or 20x the amount charged on and other online brokerages.  These fees add up, as an investor would pay $2,000 to purchase a $100,000 face value bond portfolio and then another $2,000 if the investor elected to sell bonds prior to maturity.  Depending on how long an investor owns a particular bond, these brokerage fees could exceed bond fund management fees for a similarly sized portfolio.       

Enjoy fast and efficient bond trade execution
BondSavvy founder Steve Shaw is the former head of Tradeweb direct and a senior executive of BondDesk Group, two companies that built the technology for retail brokerages to buy and sell bonds on behalf of their investor clients.  He saw firsthand the level of investment made to ensure fast and efficient bond trade execution.  Today, nearly all bond trades with a live quote are filled instantaneously, with order submission to trade execution typically taking less than one second.  Technology companies such as Tradeweb and ICE BondPoint and retail brokerages have invested heavily through the years to make bond investing more fair and efficient for individual investors.  We expect this investment and focus to continue and for individual investors to be the beneficiary of improvements made to US corporate bond market trading.       

What is a corporate bond?

Corporate bonds are debt issued by companies that pay the bondholder interest and return the bond's principal at maturity.  For example, the Albertsons 7.45% '29 bond pays the bondholder a coupon of 7.45% each year and then returns the face value of the bond -- $1,000 per bond -- in 2029.  If an investor owned 10 of these bonds, he would receive $745 of interest each year, paid semi-annually.

Today, BondSavvy only recommends bonds issued by US-based companies.  These companies range in credit quality and, as a result, investors can select from a variety of investment choices offering different levels of risk and return.

How do corporate bonds work?

Corporate bonds are issued by companies and create a number of obligations the issuing companies must fulfill that are more stringent than when companies issue stock.  With corporate bonds, issuing companies pay bondholders interest semi-annually.  For example, suppose you owned a bond that paid a 5% coupon and you owned 10 bonds.  For each bond you owned, you would receive $50 of interest each year and that interest income would be split into two semi-annual payments of $25 each.  

What is the face value of a bond?
The face value of a bond is $1,000.  This is also known as the par value of a bond.  

How are corporate bonds quoted?
Individual corporate bonds are quoted as a percentage of their face value.  Therefore, if a bond is quoted at 95.00, that bond is being valued at 95% of the $1,000 face value, or $950.  Bonds that are quoted at less than their par value are said to be trading at a discount.  Bonds trading above par value are said to be trading at a premium.

How much will I pay when I buy a bond?
Suppose you execute a trade today where you buy 10 bonds at a price of 90.  Here's how the math works: First, each bond you bought cost $900.  Since you bought 10 bonds, you will pay $9,000 in principal.  In addition, you owe accrued interest since you will receive the full interest payment the next time the company pays interest.  Bonds pay interest semi-annually on either the first or the fifteenth day of a month.  For example, a bond may pay interest on a) February 15 and August 15 or b) on March 1 and September 1.  Suppose you bought the 10 bonds on July 15 and it last paid interest on February 15.  Let's assume the coupon of the bond is 5%, so the 10 bonds would pay the investor $500 of interest annually.  In this example, interest will have accrued for five months plus two days, as interest accrues until the day immediately before the trade settles, which is two business days following the trade date.  Interest typically accrues based on a 360-day year with 12 30-day months.  Five months and two days of accrued interest is equal to: ((30 days*5 months)+2 days) / 360 = 42.2% of total annual interest or $211.11.  On August 15, the investor who just bought the 10 bonds will receive $250 of interest, which is why she needed to pay the $211.11 in accrued interest to the selling bondholder.       

What are covenants?
Bond covenants are effectively the do's and don'ts bond issuers must follow to stay in compliance with the bond indenture, a contract between issuer and bondholder.  They govern the behavior of a company to help ensure bondholders are paid interest and receive a return of principal at maturity.  An example of one financial covenant is the "Leverage Ratio," which limits the amount of debt a company can issue relative to its EBITDA, or earnings before interest, taxes, depreciation and amortization.  Some investors believe covenants add 'complexity' to bonds, but, once investors understand them, they will see how they are in place for the benefit of bondholders.  Be sure not to look for similar covenants in a stockholders' agreement, as you will never seem them in there.

What are some corporate bonds advantages?

Individual corporate bonds offer investors strong returns but with less downside than stocks.  They offer greater transparency than bond funds and ETFs as you know precisely the security in which you are investing and can invest according to your risk tolerance and investment returns objectives.  If you own an individual corporate bond, you pay a fee when you buy it and if you sell the bond prior to maturity.  This fee structure can offer considerable savings to the recurring fees investors pay when investing in bond funds and bond ETFs.

We believe there is far greater financial reporting transparency for corporate bonds compared to municipal bonds, as corporate bond issuers are required to report their financial performance quarterly and have other reporting requirements when material events occur at the company.  Municipal bond issuers have far less stringent reporting requirements.  Taken together, we believe investors can better assess the value of a corporate bond than a municipal bond since there is a far greater level of financial information available to corporate bond investors.  This presents opportunities for corporate bond investors to achieve strong capital appreciation, and, as a result, after-tax returns that can exceed those of municipal bonds.

Please click here for a detailed comparison of the advantages of individual corporate bonds compared to bond funds, stocks, and municipal bonds.

What corporate bond returns should investors expect?

Many bond investors believe a bond's yield is the only return you can achieve.  Further, many media outlets such as CNBC often say "with the 10-year Treasury yielding 3%, why would you ever invest in bonds?," implying the only bonds one can buy are Treasurys.  Payment of a fixed coupon is one of the many advantages of owning corporate bonds; however, we focus just as much on buying bonds that can increase in value and achieve a strong total return.  Our goal is to recommend corporate bonds that, over a two- to four-year period, can achieve annualized rates of return of 7-9% for investment-grade corporate bonds and 10-15% for high-yield corporate bonds.

With strong capital appreciation, after-tax returns from corporate bonds can often exceed investment returns from municipal bonds given the more favorable tax treatment of capital gains compared to interest income.

When evaluating investment performance, investors should be wary of the prices they see on their brokerage statements, which do not show the bond's total return and often undervalue the bond held.  The price shown on an investor's statement is called "an evaluated price," which is an estimated price at which a large institutional money manager could sell the bond.  Investors owning smaller quantities can often achieve better price execution than investors needing to sell $1 million plus of bonds, so always check a bond's depth of book to see what the current market price of the bond is.

What corporate bond research and corporate bond analysis does BondSavvy provide?

BondSavvy provides CUSIP-level corporate bond research, which includes between 20-25 new corporate bond investment recommendations each year.  Many investors and investment advisors do not have the time to read 10-Ks and listen to company earnings calls and do the financial analysis necessary to determine which corporate bond investments can outperform the market.  We do all of this work for you and provide the information investors need to make successful corporate bond investment decisions.

BondSavvy determines which investments present the most compelling risk-reward investment opportunities.  After we make an initial investment recommendation, we monitor company earnings releases, SEC filings, and bond performance to determine if an investment recommendation has changed.  We then advise subscribers to either buy more of the same bond, reduce holdings, or to sell all remaining bonds of that CUSIP.

How is BondSavvy different from a bond investment newsletter?

Many bond investment newsletters publish lists of hundreds of bonds and then leave it up to subscribers to figure out which ones to buy.  BondSavvy takes a different approach and narrows down the corporate bond investment universe to a small number of bonds from which investors can choose.  We review each bond recommendation during The Bondcast, an exclusive, subscriber-only webcast where we discuss the issuing company's business, industry trends, and financials. We then update our recommendations, including if and when we recommend to sell bonds.

Click here to learn how to subscribe to BondSavvy and see all of our corporate bond investment recommendations.

How is BondSavvy different than typical credit research and fixed income research?

BondSavvy makes CUSIP-level corporate bond investment recommendations whereas most credit research provides issuer-level analysis.  Issuer-level analysis would be sufficient if companies only issued one bond, but each company can issue many different bonds, sometimes over 100.  Our goal is to assess which individual corporate bonds present compelling value and can appreciate in price.  We also evaluate an individual bond's liquidity, including how often the bond trades and how many dealers are providing quotes on both the bid and offer side.  We do this since a key part of our strategy is to sell bonds prior to maturity to lock in capital appreciation and maximize returns.  It's therefore crucial to understand a bond's liquidity prior to buying it. 

We take the step traditional credit research does not, which is to narrow down individual corporate bond investment opportunities to a small number we believe can outperform the market.

What role do individual corporate bonds play in income investing?

Individual corporate bonds are a crucial component of income investing as they provide yields generally higher than Treasury bonds and muni bonds. Investors can choose from a wide variety of bonds based on their risk tolerance and investment return objectives.

Owning individual bonds helps income investors create a more precise investment plan than is possible with bond funds and ETFs.  When you own an individual corporate bond, you have a contract with the bond issuer to pay you a fixed rate of interest and to return your principal at maturity.  This enables investors in individual corporate bonds to build a reliable income stream, as compared to bond funds and ETFs, whose income streams are less predictable since the underlying holdings can change over time.

A key benefit to BondSavvy's approach to corporate bond investing, is that we seek to complement a bond's income stream with capital appreciation by recommending what we believe are undervalued corporate bonds that can increase in price and achieve strong total returns.  

Does BondSavvy advocate corporate bond trading or corporate bond investing?

Technology has advanced so corporate bond investors can trade bonds and execute at competitive prices.  That said, we do not advocate 'day-trading' of bonds but rather advise holding corporate bond investments for, generally, two to four years depending on how a bond and its issuing company are performing and the upside potential remaining in the bond.  We look to hold bonds for as long as we can maximize the return on that given bond.  While there are thousands of bonds that trade on a given day, there are not thousands - or even hundreds - of 'good' bonds that we believe are undervalued and can outperform.  This is why, if a bond spikes in price a few days after we recommend it, we continue to hold the bond until we believe we have maximized the bond's total annualized return.

A key BondSavvy differentiator is that we believe investors are better served NOT holding bonds until maturity, as this typically reduces returns, especially after a bond has achieved significant capital appreciation.  We therefore carefully study a bond's trading activity and available liquidity prior to recommending it so we know our ability to sell the bond prior to maturity.  

What credit analysis does BondSavvy conduct when evaluating investments?

BondSavvy identifies undervalued corporate bonds it believes can outperform the market.  To identify these corporate bonds, we must understand how bonds are priced relative to their credit risk and interest-rate risk.  Please see the below slide that was part of the May 31, 2018 edition of The Bondcast.  It reviews the key metrics we examine when evaluating corporate bond investments.  Below the table is a description of the select terms.  Click here to view this sample edition of The Bondcast.

Leverage Ratio: 
Total debt divided by EBITDA. If this ratio is low (1-2x), it means the company has a low amount of indebtedness (“leverage”) relative to its earnings. High-yield issuers have higher debt levels relative to earnings and have Leverage Ratios typically between 4-8x. Note that “EBITDA” is an acronym for Earnings Before Interest, Taxes, Depreciation & Amortization. It shows how much cash a company generates from operations and what it has to pay its interest, taxes, and capital expenditures.

Interest Coverage Ratio:
EBITDA divided by interest expense. The higher this is, the more cash flow a company has to pay its interest expense. If Interest Coverage is low, a company may have difficulty paying interest if its business hits a rough spot. Interest Coverage is usually 2-4x for high-yield issuers and often over 10x for investment-grade issuers. 

Upcoming Maturities
If a company doesn't have a bond maturing for seven years, chances are it's going to be money good between now and then unless the company can no longer cover its interest payments.  If, however, a company has many near-term maturities, is struggling financially, and has questionable ability to refinance its upcoming maturities, bondholders can be in for a tough ride.

We want to understand all sources available to pay for interest expense, capital expenditures, and upcoming debt maturities.  To do this, we evaluate the company's cash on hand, investments, and capacity on any bank lines of credit.

What are the best corporate bonds to invest in?

Most bond investors invest with the herd: if bond ratings get upgraded, investors buy bonds, and if bond ratings are downgraded, investors sell bonds.  This is often the exact opposite of how investors should approach bond investing.

Our goal as bond investors is to find value.  This typically means that a bond's rating does not accurately reflect its risk and/or the bond's price and yield is compelling relative to other comparable bonds.  Our success as bond investors is determined by our ability to find value in the US corporate bond market.

BondSavvy makes CUSIP-level corporate bond investment recommendations that identify undervalued bonds that can drive strong total returns.  We do not recommend bonds that are trading at a material premium to par value, as these bonds have limited upside as show in this blog post. 

We review thousands of corporate bonds to create a short list of investment opportunities. We then conduct detailed analysis on these bonds to determine which bonds have the most upside relative to the company's financial performance and other bond investment opportunities available to investors. We conduct credit analysis on both investment-grade and high-yield corporate bonds to determine which bonds provide the most compelling risk-return opportunities.  

This is a very different approach than the typical laddered bond portfolio. When investors create bond ladders, their focus is on the maturity date of the bond and not whether that bond is a good value or not. In our opinion, this limits an investor's options and reduces returns. Further, selling bonds before maturity is a key component of our bond investing strategy as it enables investors to lock in capital appreciation and increase bond investment returns.

How To Do a Fidelity Bond Search customers can search for bonds online and execute trades with the click of a few buttons.  Bond investing has come a long way over the last 20 years, and Fidelity has been at the forefront of developing user tools to make bond investing efficient and transparent.

How do you search for bonds if you know the CUSIP?
If you subscribe to BondSavvy, we provide you a list of recommended bonds, including a detailed presentation discussing our rationale for the investment, an overview of the issuer's business, and an analysis of the company's financials, capital allocation, and business momentum.  We also provide you with a CUSIP, which is a nine-digit number that identifies the bond you are buying.  It's an acronym for "Committee on Uniform Securities Identification Procedures," and if that doesn't get you jazzed up about investing in bonds, we don't know what will. 

Bonds need CUSIPs since companies issuing bonds will often issue a number of bonds.  Companies can get away with only have one stock ticker symbol since only one stock of most companies trades.  In bonds, however, investments are identified by CUSIP numbers.  If you have the CUSIP, all you need to do is log into Fidelity and then do the following:

  1. Click "Accounts & Trade" and then select "Trade" from the drop-down menu
  2. In the "Trade" screen, you will click the "Fixed Income" button on the menu right below the word "Trade"
  3. Enter the CUSIP when prompted on the next screen and indicate if you want to buy or sell bonds
After these three steps, you will arrive at the order ticket where you will enter the number of bonds you want to buy or sell and the limit price at which you want to buy or sell the bonds.  Within a few more seconds, your trade will be executed.

How to do a Fidelity bond search if you don't know the CUSIP?
If an investor doesn't already know the corporate bond's CUSIP, he or she will need to do an online bond search.  The first two steps of a Fidelity bond search are the same as for when you know a bond's CUSIP, but there are a few more steps you need to take if you do not know the bond's CUSIP.  Here's a full walk-through of conducting a Fidelity bond search when you do not know a bond's CUSIP:

  1. Click "Accounts & Trade" and then select "Trade" from the drop-down menu
  2. In the "Trade" screen, you will click the "Fixed Income" button on the menu right below the word "Trade"
  3. Click the "Search Inventory" hyperlink
This will take you to a page titled "Fixed Income, Bonds & CDs" and you then have several options to further narrow your search:

If you know the issuer you want to search:
  1. In the box labeled "By CUSIP or Type (for bond name)" select "Corporate" from the drop-down menu
  2. You then enter the issuer's name in the "Search for Corporate Bonds" box
There are a few caveats with which you should be aware when you enter a bond issuer's name.  If the bond is issued by a company that hasn't assumed debt of an acquired company, your search is straightforward.  For example, if you search "Apple" you will find all of the bonds issued by Apple Inc. as, to the best of our knowledge, Apple has never assumed the debt of an acquired company.  Companies with more than $200 billion in cash can do that.

Where things get somewhat trickier is when one company buys a number of other companies and assumes the debt of those other companies.  For Fidelity bond search purposes, the original bond issuer will keep its name.  Therefore, if you conduct a Fidelity bond search for "Company ABC" and that company had bought Company XYZ, a search for Company ABC would not return the bonds of Company XYZ.  When BondSavvy analyzes the bonds of different companies, we know what companies it has acquired and can search for bonds of issuers who all fall under the same parent company.      

If you don't know the issuer you want to search:

  1. Go about three-quarters of the way down the page, and you will see a menu with six choices: US Treasury, CDs, Agency/GSE, Municipal, Corporate, and All Offerings.  Click "Corporate"
  2. Then click either the "Investment Grade (Secondary)" or "High Yield (Secondary)" hyperlink based on the credit ratings you would like to search
As we discuss in Why We're Pouring Ketchup on Bond Ratings, we recommend looking at a variety of ratings, as, the bond ratings often don't correctly evaluate a bond's creditworthiness and bond ratings do not speak to whether a bond is a good investment, as they ignore the price, yield, maturity, and interest-rate risk of a bond.

When BondSavvy conducts Fidelity bond searches, we like to see as many bonds in the search results as possible, so we try not to 'over-filter.'  The reason we do this is, even if we may not recommend bonds within a certain sector, it's helpful for us to know the yields to maturity and bond prices of a wide variety of corporate bonds so we can assess the value of various corporate bonds in which to invest.

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