【summary】
Unsecured corporate bonds are corporate bonds issued by companies to borrow money from investors that do not come with collateral such as land or buildings.
Since there is no collateral, investors rely on the creditworthiness of the issuing company.
企業が社債を発行する
↓
投資家が購入する
↓
企業は利息を支払う
↓
満期に元本を返すCorporate bonds are not deposits, although they may appear to have higher yields than deposits.
If the issuing company's financial condition worsens, interest and principal payments may be affected. If you sell the property midway through, the price may drop depending on interest rates and market conditions.
In this article, we will explain for beginners how unsecured corporate bonds work, how they differ from secured corporate bonds, why yields tend to be high, and points to check before investing.
Please note that this article is a general explanation of bond investment and does not recommend the purchase of specific corporate bonds. When actually investing, please check the prospectus, documents delivered before contract conclusion, explanation of the selling company, financial status, rating, fees, and tax system of the issuing company.
Just the conclusion first
When looking at unsecured corporate bonds, it is not just the yield that is important.
There are five things beginners should check first:
| Items to check | Reasons to watch |
|---|---|
| Creditworthiness of the issuing company | See if the company can repay interest and principal |
| Ratings | Useful as reference information for determining creditworthiness |
| Interest rate/yield | See if the conditions are worth the risk |
| Period until maturity | See how many years to lock in funds |
| Mid-sale risk | Selling before maturity may result in loss of principal |
Unsecured corporate bonds are investment products based on a company's creditworthiness.
Instead of buying based only on the high yield, you need to look at ``why the yield is that high.''
How unsecured bonds work
Corporate bonds are bonds issued by companies to raise business funds.
The Japan Securities Dealers Association also describes corporate bonds as bonds issued by companies to raise business funds such as capital investment.
For example, suppose a company needs 10 billion yen for factory construction and capital investment.
In addition to borrowing from banks, companies may also issue bonds to raise funds from investors.
| Position | What we do |
|---|---|
| Investor | Purchases corporate bonds and receives periodic interest |
| Businesses | Raise funds, pay interest, and return principal at maturity |
In the case of unsecured bonds, there is no collateral such as land or buildings.
Therefore, the most important thing for investors is whether the issuing company can pay interest and principal as promised.
Differences from secured corporate bonds
Some corporate bonds come with collateral and some don't.
A rough summary of the differences is as follows.
| Item | Unsecured Bonds | Secured Bonds |
|---|---|---|
| Collateral | None | Yes |
| Backing of repayment | Creditworthiness of the issuing company | Creditworthiness and collateral of the issuing company |
| Yield | tends to be slightly higher | likely to be slightly lower |
| Importance of creditworthiness | Very high | High |
| Risk | Possibility of losses due to financial deterioration of the issuing company | Even if there is collateral, there is no guarantee that there will be no loss |
Secured bonds have the potential to be recovered from the collateral in the event of an emergency.
On the other hand, unsecured bonds cannot rely on collateral.
That's why we need to look more carefully at ratings, finances, performance, use of funds, and terms of issuance.
Why do unsecured corporate bonds tend to have higher yields?
In general, the higher the risk of a bond, the higher the yield offered to investors.
Unsecured corporate bonds have no collateral, so investors bear the credit risk of the issuing company directly.
Therefore, they may offer higher interest rates than government bonds or deposits.
信用力が高い
↓
利回りは低くなりやすい
信用力が低い
↓
利回りは高くなりやすいHowever, high yield does not mean "good value".
High yields may incorporate credit risk, liquidity risk, interest rate fluctuation risk, etc.
The higher the yield of a corporate bond, the better to check why it is so high.
Ratings are reference information for checking creditworthiness
Ratings are used when looking at corporate bonds.
A rating is an evaluation by a rating company of the issuer or bond's ability to pay principal and interest, and is indicated by a symbol.
Generally, it looks like this:
| Rating example | How to view |
|---|---|
| AAA | Very high creditworthiness |
| AA | High creditworthiness |
| A | Relatively high creditworthiness |
| BBB | Often considered the lower end of investment grade |
| BB or lower | Often considered a speculative rating |
Many bond commentaries explain that bonds rated BBB or higher are investment grade, and those rated BB or lower are speculative.
However, ratings do not guarantee payment of principal or interest.
It is not as simple as saying that a product with a high rating is definitely safe, and a product with a low rating is definitely dangerous.
It is only a reference material for determining credit risk.
Points to check before investing
1. Creditworthiness of the issuing company
With unsecured corporate bonds, repayment is backed by the creditworthiness of the issuing company.
The items you want to check are:
| Items to see | Things to check |
|---|---|
| Sales/Profit | Are you producing stable profits? |
| Equity capital | Is there financial strength |
| Borrowings | Is the debt too heavy |
| Cash flow | Are you generating cash to pay interest and principal? |
| Use of funds | What will the raised funds be used for |
Corporate bonds may appear to have slower price movements than stocks.
However, if your creditworthiness deteriorates, the loss is not small.
2. Don't choose based on yield alone
There is a reason for the high yield.
for example,
業績が悪化している
借入が多い
格付が低い
満期までの期間が長い
市場で売りにくいInterest rates may be high for several reasons.
If you buy just because it's more expensive than deposits, you will later realize credit risk and price fluctuation risk.
3. Will the funds last until maturity?
If a corporate bond is held to maturity, it is designed to be redeemed at face value unless the issuing company defaults on its obligations.
However, if you sell it midway through, the story changes.
If interest rates rise or the issuing company's creditworthiness becomes uncertain, corporate bond prices may fall.
If you buy with life defense funds or funds that you plan to use in a few months, there is a risk of selling early.
4. Don't concentrate too much on one company
Corporate bonds are products that take on the credit risk of the issuing company.
No matter how famous a company is, if too much money is invested in a single company's bonds, issuer risk will be concentrated.
Diversification is important even when investing in bonds.
発行体を分散する
満期を分散する
株式・預金・投信など他資産とのバランスを見るIf you keep this in mind, you will be less dependent on a single corporate bond.
Points that beginners tend to misunderstand
| Misconception | Actual |
|---|---|
| Safe because it is a corporate bond | If the issuing company deteriorates, there is a possibility of losses |
| The higher the yield, the better it is | High yield may be a sign of high risk |
| Guaranteed principal if held until maturity | Principal may not be returned if the issuing company defaults |
| Peace of mind with a rating | Ratings are reference information, not guarantees |
| Can be sold at face value at any time | Selling at market price may result in loss of principal |
What is especially important is that corporate bonds are not deposits.
It is also not covered by deposit insurance.
If you think of it as ``like a deposit with a high yield,'' you will misjudge the risks.
Simple checklist when looking at individual corporate bonds
When considering corporate bonds for individuals, it will be easier to understand if you check them in this order at least.
1. 発行企業は何をしている会社か
2. 期間は何年か
3. 利率は税引前・税引後でいくらか
4. 格付はあるか
5. 資金使途は何か
6. 満期まで持てる資金か
7. 途中売却した場合の価格変動を理解しているか
8. 1社に集中しすぎていないかThis check does not eliminate risk.
However, it is viewed much more calmly than judging based on yield alone.
Summary: Unsecured corporate bonds are products that invest in a company's creditworthiness.
Unsecured corporate bonds are corporate bonds without collateral that are issued based on a company's creditworthiness.
Investors expect to receive interest and repayment of principal at maturity.
However, the assumption is that the issuing company can continue to make payments as promised.
If you are a beginner, you should keep in mind the following four points.
発行企業の信用力を確認する
↓
格付を見る
↓
利回りだけで判断しない
↓
1社に集中しすぎないUnsecured corporate bonds are products that can be expected to yield higher yields than deposits, but they also bear the credit risk of the company.
Rather than looking at "high yield," look at "Is the risk worth the yield?"
Starting from here is the most realistic way to invest in corporate bonds.
This article is a general explanation that summarizes the basic knowledge of bond investment, and does not recommend the purchase of specific corporate bonds or financial products. Please check the prospectus, distributor description, issuer's financial information, ratings, fees, taxation, and liquidity before making any investment decisions.
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Reference
- [Japan Securities Dealers Association "How to obtain information on characteristics, risks, and prices of corporate bonds for individuals"] (https://www.jsda.or.jp/about/hatten/risk/shasai/index.html)
- J-FLEC “What types of bonds are there?”
- Mitsubishi UFJ Morgan Stanley Securities "How to start investing in bonds"
- [Financial Services Agency "Expert Column: Bond investment such as government bonds and corporate bonds"] (https://www.fsa.go.jp/policy/nisa2/column/column-04.html)