2019 Compelling Alternatives for Cash Investors - April 2019
2019 April - COMPELLING ALTERNATIVES FOR CASH INVESTORS
Taking considered interest and credit risk - April 2019
WHAT IS INTEREST RATE RISK?
The possibility that the value of a bond (or other debt instrument) will decrease due to rising interest rates.
Most bonds pay a fixed rate of interest over a defined period of time. This rate is set according to prevailing market interest rates at the time of issuing the bond. Here is how it affects the market price of the bond.
WHAT IS CREDIT RISK?
The possibility that the investor might not be repaid by the issuer of the bond.
In simple terms, bonds can be thought of as a contract or set of promises between two parties – the bond issuer and the lender. The risk for the lender is that the borrower is unable to return the capital at the stipulated time or make the agreed upon interest payments. The credit risk associated with corporate bonds is higher than that of government bonds. In a worstcase scenario, government is assumed to be able to print money to make good on its obligations. Corporates therefore borrow at higher rates than governments. The difference between corporate and government interest rates is referred to as the ‘credit spread’.
We are highly cognisant of credit risk and only invest in corporate bonds when we believe that the yield compensates for the risk, or when there is a general rise in credit spreads. All credit decisions are subject to oversight by Coronation’s independently chaired Credit Committee.