Question

You are speaking to a high school class on accounting as a career field. One of the students, Taylor, asks a question. She explains her Aunt Abbie gave her a $1,000 and told her to invest it wisely. In the high school class, they are studying bonds, similar to the information in this module. Taylor shares: one evening Taylor is having a conversation with two friends, and she mentions her interest in investing the $1,000 in corporate bonds.

Her friend, Jacob, says he saw a website where corporate bonds were selling at a premium. Since the bonds were selling at a premium, the bond investment would yield more than the stated bond rate of return, and this would be a good investment. Taylor was very interested because her Aunt would be proud of her for making a good investment with the money.

Then Taylor’s other friend Fatima says, “Are you serious? Don’t you know corporate bonds are very risky investments? You will lose everything.” Taylor’s Aunt Abbie would not want her to lose the $1,000. Taylor shares she does not like risk.

Answer 1

Yes bonds are risky venture. And any kind of investment in a company is a risky venture. But the risk varies from nature of the bonds. Talking about bonds, risk will arise only if nothing is left with the company that means it goes bankrupt. Other than that regular interest payments is a legal obligation for the company. Also bond has a redemption period and the company is legally obliged to repay the bond amount at the end of the period. So to decide whether to invest or not, the financial and operating risk of the company should be assessed to know whether the company will be able to produce revenue and pay the obligations on time.