Is it a good idea to buy some Senior Notes (Baby Bond) for Bond interest?
Posted: Wed Sep 09, 2020 9:55 am
It seems there are some merits in baby bond compared to normal corporate bonds and bond ETF,
VS normal bond
Only a slice of entry cost
Each baby bond incurs a smaller purchase cost which makes it easier for diversification than buying corporate bonds
Higher interest return
Let says the issuer is Ebay, not a junk issuer, with stable credit rating, its baby bond interest return % is much higher than a "normal" bond of similar grades. For most normal bonds of similar grades, the return % is only around 3% or less.
VS bond etf
Have maturity dates
Baby Bond works like a bond in the sense that the principal can be returned upon maturity date / redemption date. But if I buy etf like LOQ, it has no maturity date and less certainty to get back the principal in full amount.
Nonetheless, some associated risks:
High volatility in market crashes
Bonds are traditionally viewed as a volatility buffer in market crash protecting the stocks. And baby bond/ senior notes are surely failed in this respect. But, what if I don't mind the volatility , are they still a good choice to juice up the interest return?
Higher default risk
Since senior notes may be in lower repayment seniorities than secured bonds, higher default risk would arise during economic crisis risking the principal. I would have to be more careful in choosing the issuers of senior notes. Perhaps bring more attention to their fundamentals / credit rating.
These are the pros and cons I could come up with, any puzzles I am missing? Are Senior notes too good to be true?
Much appreciated for any thought. Totally new to this and still confused.
VS normal bond
Only a slice of entry cost
Each baby bond incurs a smaller purchase cost which makes it easier for diversification than buying corporate bonds
Higher interest return
Let says the issuer is Ebay, not a junk issuer, with stable credit rating, its baby bond interest return % is much higher than a "normal" bond of similar grades. For most normal bonds of similar grades, the return % is only around 3% or less.
VS bond etf
Have maturity dates
Baby Bond works like a bond in the sense that the principal can be returned upon maturity date / redemption date. But if I buy etf like LOQ, it has no maturity date and less certainty to get back the principal in full amount.
Nonetheless, some associated risks:
High volatility in market crashes
Bonds are traditionally viewed as a volatility buffer in market crash protecting the stocks. And baby bond/ senior notes are surely failed in this respect. But, what if I don't mind the volatility , are they still a good choice to juice up the interest return?
Higher default risk
Since senior notes may be in lower repayment seniorities than secured bonds, higher default risk would arise during economic crisis risking the principal. I would have to be more careful in choosing the issuers of senior notes. Perhaps bring more attention to their fundamentals / credit rating.
These are the pros and cons I could come up with, any puzzles I am missing? Are Senior notes too good to be true?
Much appreciated for any thought. Totally new to this and still confused.