Investing for income: new opportunities from corporate bonds

?? °2μ??3?￡???1 By Andrew Hitchings í?±?μ?￡¨ò?￡???  In recent years, financial markets have become increasingly polarised between growth and security. Investors looking for a medium-to low-risk route to income in-vesting are increasingly turning to the corporate bond market as an alternative to equities and government bonds.??Equities and government bonds are well suited to some investors. Younger in-vestors will benefit from equity capital growth because they are generally invest-ing for thelonger term and not unduly concerned at the lack of immediate yield. Investors concerned with avoiding risk willbe prepared to accept the relatively low yields now available on government bonds.??But many investors fall somewhere be-tween these two extremes. Corporate bonds offer an alternative to equities and government bonds, providing some of the benefits of each. With corporate bonds, an investor can opt for a lower risk exposure than with equities but a higher income yield than with government bonds.??In Singapore, for example, a govern-ment bond maturing in 2004 with a cou-pon of 3.5% will currently yield about 3.4%.This is to say, for every S$100 of face value, the bond is currently selling for S$100.50, so that the annual coupon ofS$3.50 is worth about 3.4% of the actual price.??By comparison, the Ford Motor Cor-poration's bond issued in Singapore dol-lars and therefore carrying no currency risk for a Singapore investor also matures in 2004. It carries a coupon of 4.5% but currently sells at slightly below its face value, at around S$99.50 per S$100 of nominalvalue. ??This means that the yield for an investor is a little higher than the coupon, at around 4.6% of the actual price. The difference between two yields is commonly called the 'spread'. At the moment, as we see, the spread between Ford and Singapore gov-ernment bonds is around 1.2%. This rep-resents the reward to the investor for ac-cepting the somewhat higher risk attached to Ford as opposed to the government of Singapore. ??This is a wider spread than Ford would expect to pay in the US or Europe. Ford may be willing to pay this extra at present as a means of building goodwill among Singapore investors, which it hopes will be to its benefit in later years. ??The main disadvantage of corporate bonds is that an investor only indirectly participates in the company's success, through its credit-worthiness, but other- wise willnot benefit from corporate ex-pansion in the way that equityholders will has no participation in the company's suc-cess.On the other hand, absolute risk is lower than for equities because coupon payments cannot be waived and, in the event of a default, bondholders are ranked highly among creditors.??However, corporate credit-worthiness is a key facto