Our Bond Offerings
Through our parent company Scott & Stringfellow, our clients have access to products and services that allow for many investment choices.Why Buy Bonds: Advantages And Risks Of Bond Ownership
Compared to alternative investments, investors purchase bonds to take advantage of their many benefits, namely relative safety and capital preservation. Because the bond issuer must pay back the bond's face value at maturity, an investor's original principal is typically preserved, unlike stock, where the investor can lose the original investment value. It is important to understand that the quality of each bond (generally reflected in its rating, discussed in detail below) determines the bond's safety and ability to preserve capital.- Fixed Return: Investors receive fixed, regular interest payments which provide an element of predictability versus common stocks where the returns are less certain (except for dividend payments which may be quarterly, but not guaranteed);
- Current Income: For those wanting a regular cash income, some bonds provide regular interest payments at set times;
- Reduce Portfolio Risk: As compared to equities, investment grade bonds can be a way to reduce the risk in an investment portfolio;
- Capital Appreciation: Some investors may benefit from trading bonds in the secondary market with the intent to take advantage of price increases, much the same way as they would trade stocks. However, investment returns and principal value will fluctuate and when redeemed may be worth more or less than their orignal cost.
As with any type of financial investment, bonds include some degree of risk. Determining your risk tolerance is a crucial element to consider when investing in bonds and developing a portfolio strategy. It is important to note that not all bonds are safe and that not all preserve capital; that some bond issuers may default on the principal payment, even if the bond is held to maturity. Other risks include:
- Credit Risk/Credit Ratings: Credit risk is the risk associated with the issuer's ability to make timely principal and interest payments to its creditors. The U.S. government is considered to have the least credit risk of all bond issuers. Federal agencies have only somewhat greater credit risk than the U.S. government due to the close relationship these agencies enjoy with the government. Corporate and municipal bonds are rated by the two major credit ratings agencies, Moody's and Standard & Poor's, on an "alphabetical" scale. While these two agency's ratings are very similar, they are not identical.
- Interest Rate Risk: Interest rate risk, also referred to as market risk, is the risk that rising interest rates will cause a bond's price to fall and decrease the value of an investment. However, how much a bond's price will move for any one percent (1%) change in interest rates will depend on many factors such as its credit risk, time to maturity, coupon rate, and supply and demand conditions.
- Bonds that have longer maturities or lower coupon rates have a greater percentage change in their price with a move in interest rates. Bonds that have shorter maturities and higher coupon rates tend to have more price stability.
- Marketability Risk: The risk that the bond will be difficult to sell, which affects some classes of bonds more than others.
- Call Risk: The risk that an issuer may redeem a bond earlier than its original maturity date. This risk is more relevant during periods of declining interest rates.
- Purchasing Power Risk: The risk that inflation will lower the value of a bond's principal and interest payments.
- Reinvestment Risk: The risk that as coupon payments are received on a bond, they must be reinvested at lower interest rates.
