I have a fixed interest corporate bond (PEP)with Legal and General bought in March 1999 for 6000 pounds. In Feb. 2002 I took out 1700 pounds. A week ago it was standing at 6800 pounds. it is accumulation units. I need advice as to what I should do. Shall I switch to somethign else? How do such bonds work? Do they follow the stock market?

hi deepwaters

corporate bonds-'Do they follow the stock market'?

In the same year as you, I put £6000 into four funds run by Jupiter, UK Income, UK Growth, European and Finacial Opportunities Fund. I have just sold them for £17,987 to start a HYP . My wife in the same year put £1000 into to L&G Corporate Bond, reinvested the divs and sold for £1519 last week to start her HYP.
In our case the stockmarket (my funds) returned 300% and the bond returned 50% so I don't think they follow the stock market.

Regards
woodview

corporate bonds-'Do they follow the stock market'?
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no - my understanding is they follow interest rates, rising interest rate reduces value, and the reverse

probably more complex than that !

Mike

Corporate bonds are loans. Corporate bond funds like the one you've got comprise of many individual bonds. Bonds are a bit like gilts, except that they are issued by companies (BP, Tesco etc.) instead of the government. They pay out a fixed amount each year which is higher than you would get in a bank or b/s to compensate for the increased risk of the companies defaulting on the debt. Because the amount the bond pays is fixed, when general interest rates rise, bond prices have to fall to maintain the premium; conversely when interest rates fall, bond prices go up. Corporate bonds, with the exception of high yield (junk) bonds, are generally much less risky than stocks.

Bonds do not follow the stock market. In fact, because they act differently to stocks they are often recommended as part of a balanced portfolio to spread the risk. One portfolio which has shown to perform well over many years is a mix of 50% stocks (eg. index tracker) and 50% bonds. This is then rebalanced every year to maintain the 50:50 ratio. The inclusion of (less risky) bonds in the portfolio helps to smooth out the returns from the stock market.

If you are looking for exposure to the stock market, then corporate bonds won't offer you this. If, on the other hand, you are looking for a low risk investment which pays a bit more than sticking it in the b/s, then bonds are a reasonable option.

-NJ

I am no expert but the price of domestic bonds have been falling recently due to rising interest rates, you do not say which country or countries your money has been invested in. In the UK the interest offered on 10 year government bonds is lower than short term bonds or bank accounts, this is because the bond market expects interest rates (and inflation) to fall over the coming years though demand by the pension funds for gilts may be distorting things a bit, I dont know. Any way if interest rates do fall then your bonds will increase in value so unless you really need the money now personally I would hang on to them if they are domestic bonds untill interest rates are lower than whatever they were when you bought them. So you need more information before you can decide what to do, where are they invested? What is the modified duration? this will be a figure in years, if it is 5 years for instance this tells you that your bonds capital value will increase by 5% for every 1% fall in interest rates and vice/versa. You also need to know if they are investment grade bonds or junk bonds which are more closely corelated with equities apparently. (?)
Andy

I have a fixed interest corporate bond (PEP)with Legal and General bought in March 1999 for 6000 pounds. In Feb. 2002 I took out 1700 pounds. A week ago it was standing at 6800 pounds. it is accumulation units. I need advice as to what I should do. Shall I switch to somethign else? How do such bonds work?

It depends, you may have a corporate bond fund, in a PEP wrapper, which as others have said is a managed fund that invests in corporate bonds, effectively loans to companies that can be bought and sold. The way to think of these is say a company issues £100m of bonds at 5%, imagine that's a black box spewing out £5m per year. If general interest rates go to 2.5%, then you'd have to have £200m to generate £5m/year at the prevailing interest rates, so the bond doubles in value. And vice versa. So in general bonds do better when interest rates are falling and vice versa. You also have to consider the risk of default - you get lower interest rates on government bonds (known as gilts in the UK) because of the low perceived risk, something like Vodafone will yield a little more, the bonds of small companies yield much more. This risk premium declines (so capital values go up) when the economy is doing well, and capital values go down when people think there will be a recession. There's a school of thought that bonds are currently in a massive bubble thanks to pension funds being forced to chase 'safe' investments and the markets generally being far too complacent about risk, but I really don't follow bonds closely enough to be able to comment.

To be honest bonds don't get a lot of coverage on TMF, although there is a dedicated bonds board (http://boards.fool.co.uk/Messages.asp?bid=50085) which you might want to read. Ditto the general funds board (http://boards.fool.co.uk/Messages.asp?bid=50097) The main trouble with this kind of fund is that the costs are high. You might also want to think about investing in something that you understand better.

The other thing that's worth mentioning as it's not clear, you may have an insurance company 'investment bond' which is a poisonous product much beloved of IFA's as the massive commissions contribute mightily to their Lexus fund. Such products are hamstrung with all sorts of conditions and penalty clauses, you want to avoid them in principle but once in you may have problems getting out efficiently. Best place to discuss them would be the Endowments board :
http://boards.fool.co.uk/Messages.asp?bid=50083

Many thanks for all the post on corporate bonds. So it seems like my Legal and General corporate bond PEP isnt doing well compared to woodview's. I wonder if I should switch over to something else? By the way what is HYP? many thanks for any comments.

Hi deepwaters

Sorry that I put HYP and not High Yield Portfolio. This is form of holding individual shares, ideally 15 in equal amounts, that are mostly from the FT100 largest UK companies that offer an above average dividend yield. You can find out about them here:
http://boards.fool.co.uk/Messages.asp?mid=10450170&bid=51166

I think our corporate bonds performed about the same, you must remember you took out £1700 and that would have reduced the end value.

Corporate bonds give a smoother ride than shares so you may not like the rise and fall as much as with shares or unit trusts.



regards
woodview