Money Rehab with Nicole Lapin - How To Tell If a Corporate Bond Is a Good Investment with Sam Nofzinger, GM of Brokerage at Public

Episode Date: September 13, 2024

You've heard a lot on the show about government bonds. But did you know that many companies (ones you know, like Apple, Nvidia, and a ton more) also issue bonds? To tell you everything you need to know about corporate bonds, Nicole is talking to Sam Nofzinger, the GM of Brokerage at Public. Nicole and Sam talk about why companies issue bonds, how to tell if a corporate bond is investment-worthy and what you need to know before you invest. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA & SIPC. Brokerage services for treasury accounts offering 6-month T-Bills are offered by Jiko Securities, Inc., member FINRA & SIPC. Banking services are offered by Jiko Bank, a division of Mid-Central National Bank. Securities investments: Not FDIC Insured; No Bank Guarantee; May Lose Value. See public.com/#disclosures-main for more information.

One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that

I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress. Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A. Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details.

I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your

reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Hey, money rehabbers. It's Morgan. I'm the executive producer of the show,

and I'm going to tell you about what you're going to hear in today's episode. Today, you're going to hear Nicole talk about corporate bonds. And she's talked a lot on the show about government bonds, things like T-bills, inflation-protected treasuries, savings bonds, you know the ones. But there's a whole other world of bonds issued by companies like Apple, Microsoft, NVIDIA, Meta, Alphabet, and as it turns out, a whole lot more. Nicole is going to tell you everything you need to know about bonds, but she's not going to do it alone. She's joined by Sam Nofsinger today, who is the GM of brokerage at Public. And as you know, because Nicole talks about it a whole lot, Public is Nicole's favorite place to buy bonds and not just government bonds, but corporate bonds too. Public actually has a bond yield account, which contains corporate bonds, which on the day this episode is airing,

the yield is 6.83%. Although that is subject to change unless you lock it in. Nicole and Sam talk about why companies issue corporate bonds, how to tell if a bond is investment worthy, and what kinds of returns you can make by investing. And just so you know, you'll hear throughout the episode, some background noise, regular city stuff like honking, cars going by, maybe some voices, probably like you can hear my puppy in the background of this recording right now. Life has background noise, so it goes. Enjoy the conversation. Sam Nofziger, welcome to Money Rehab.

Thank you so much for having me. Pleasure to be here. So today we're going to do a mini masterclass on corporate bonds. Thank you so much for helping us with this. Obviously, I just need to start with the basics. What is a corporate bond? So a bond just basically is a loan. So similar to how if someone asks you for money and they say, hey, can I borrow a thousand bucks, right? I'll give you back a thousand bucks plus $50 in interest next year. It's kind of the same thing like that, except instead of dealing with your friend or dealing with a family member, you're dealing with a big corporation. Corporations like

Apple or Nvidia or Microsoft, they offer bonds to the investing public to raise money for different needs that they have. And so investors have the ability to not only purchase stock in these companies and kind of ride the wave on profits, but they can say, hey, you know what, instead of lending money to the bank, instead of lending money to the US government, I trust Apple, I trust NVIDIA, they're paying attractive yields, let me park some of my money there and actually invest in fixed income as opposed to cash or other things to earn yield. So you mentioned public stocks, NVIDIA, Apple, Microsoft, all of the big ones have corporate bond offerings,

smaller ones too, but can both public and private companies issue bonds or essentially IOUs as you describe them? Yes, anyone can issue bonds and it's funny. In the stock market, there's about 10,000 stocks that folks can buy and sell. In the bond market, there's about 10,000 stocks that folks can buy and sell. In the bond market, there's over 1.5 million different bonds that people can buy. And a lot of those are smaller private companies.

And a lot of those are just companies issuing many bonds over time. So I think it's helpful to step back and understand why companies issue bonds. When we talk about treasuries, which are bonds issued by the government, we talk about this idea that if the government or a state or a municipality wants to do something, build a road or a bridge or something, they'll issue bonds to the public. And for the privilege of using somebody's money for a certain amount of time, they'll give it back plus interest. Essentially, that's what companies are doing with corporate bonds, too. But can you explain why they would want to essentially raise money in this way versus a stock offering?

Sure. And the general answer is it's cheaper for the companies to offer bonds as opposed to equities if the company is mature. So Apple can go out and raise a bunch of money in the stock market, but then that dilutes all the owners of Apple, and they don't really like that. However, Apple can say, hey, we can raise money through a bond offering, not dilute our shareholders

and actually still raise money in a very efficient way because people trust Apple to pay them back. So Apple has that ability to offer bonds at very low rates in the market and raise money through that, which is cheaper than them offering equity, which is really valuable to shareholders and also Apple. On the flip side, if you're a young company, people don't trust you to pay them back.

So you actually can't offer bonds. And if you did, you'd have to pay yields of 40%, 50%, right? And that doesn't make sense to most companies. So younger companies are often forced to issue equity because that's the only route that's available to them. Whereas if you're mature, people trust you to pay them back. So you're able to offer these lower risk investments, still bring on capital so you can fund your business, you can fund your operations, but you don't have to dilute your existing shareholders. And so a lot of people prefer issuing debt because it's cheaper and it doesn't dilute the owners. So you bring up this really important idea of trustworthiness, right? So with governments, the United States is more likely to pay you back. With companies, Apple is more likely to pay you back. With governments,

you know, a smaller developing country, not as likely to pay you back if, God forbid, something happens to that country. So they have to give you more of a return in order for you to give them your money in the first place. Same thing happens with companies, too. So not every company is Apple. There are smaller companies. There are maybe companies that could face the risk of never paying you back if they go through bankruptcy or something analogous to what a country would go through. So can you explain what the rating system looks like for corporate bonds so you can assess what that trustworthiness is for companies? Sure. And because, right, not everyone's a bond nerd, not everyone's looking through detailed financial statements to try and figure out if this company is paying me back. A lot of people offload that work to credit rating agencies. Think about your

Moody's, your S&P Global. These are companies with thousands of analysts who are really pouring through the details of every bond issuance, going over the company's financial profile. And then they basically give a grade to this debt that says, hey, based on our analysis, we think there's a good chance or a small chance that it will make good on all of their obligations. And the way they do that, folks might have heard of, hey, this is a AAA rated or investment grade, right? These are just different kind of classifications that these credit rating agencies use to divvy up the different bond universe into risky and less risky buckets. And so for investors, the credit ratings is a really easy way to look at

a specific bond and say, hey, this is AAA. I don't have to worry about that one. Someone's done all the work. It's good. It's probably going to pay me back. Oh, this is a C rating, which is basically a junk bond, a high yield bond, or what people call junk bonds, they're not that trustworthy. And so because they have a C rating, right off the bat, hey, red flags, there might be some difficulties with this company going ahead. I should be a little bit more careful. They go from your AAA, AA is very good, single A is good, BBB, BBB, still pretty good. Then you get down into the single Bs, Cs, and that's where folks start to have some concerns.

And you mentioned high yield or junk bonds. This concept is so funny to me because high yield sounds amazing, right? You're like, I want a high yield, but it's also a junk bond. And then when you hear junk bond, you're like, no, thank you. So can you explain how the yield and the rating work?

It's almost like a seesaw, right? Exactly. And just like in the stock market, there's no free lunch. So if you see a high yield on something, if you're looking at something and you're looking at two bonds, one is going to pay you 5% and one's going to pay you 20%, red flags, red alarms should go off in your head. That 20% bond, if they make due, could be a good investment. But the reason that it is so high and so much higher than everything else is because the market has really strong concerns that they may not pay you back. And so in the bond market, if you look at something and it's too good to be true, chances are it may be too good to be true. And you may want to pass on that high yield because in actuality, you may not get that at the end of the day.

Apple's not going to give you 20%. Exactly. So Apple, unfortunately, barely gives you more money than the U.S. government because some people trust Apple more than the U.S. government. And so for companies like that, you really are only getting a small amount of extra income. Whereas if you do look to a company who is less mature than Apple, you can pick up greater yields. And there's a big way between Apple and a company that's going to default, right? As I said, there's 1.5 million bonds. And so there's a huge middle ground for people to look at. And there's still very attractive places where sure, Apple might give

you four and a half percent, but there might be a pretty attractive company that's going to pay you 6% or 7%. And that's actually not too bad in this environment. So you want to just assess the risk and the reward because you're not going to get low risk and high reward. You're something's going to have to give. Like you said, you explained it really well. No free lunch here. So anything triple B negative and above is considered investment grade. For our normal credit scores as individual humans, we have a lot of different factors, right? Utilization score, debt repayment history. What goes into the factors for these companies and how they're rated? A lot of it is, a lot of it can be how much money that they're actually making. So what are their profits every

year? Because their profits are what they are able to pay back, right, these bond investors. And if they don't have profits, then they have to figure out some way to how to generate this cash flow to give to their bond investors. Because remember, they guarantee these bond investors that they're going to pay them every year. And so this company better be sure that it's making profits every year in order to pay them. So a lot of times it's just, is this company profitable? And is it continuously profitable over time? Because you don't want five years of no profits because then they're going to have trouble paying these interest payments. Which brings us to another important part. How much debt do they currently have? The more debt that a company has, the more money they are guaranteed to pay out of their company every year. And so if profits go

down, their fixed amount that they have to pay out is still the same.. And so if profits go down, their fixed amount that they have to pay out is still the same. And so if they have more debt, they have more obligations to pay out. And if their business is run into trouble, they're going to have more difficulty paying those interest obligations. So a lot of it is, hey, how is this company doing? Are they generating enough profits in order to pay these bond investors what they obligated to pay them? And two, how much other debt do they have on their balance sheet? Because in case something goes wrong, they don't want to get into a situation where they have so much debt, they have so many obligations every year to pay out that it's just not viable from their business standpoint. So I guess for individuals, for

companies, a debt to income ratio is important. Exactly. Because if you have too much debt, people get worried that you have too much debt, people get worried that you have too much interest to pay and you may stumble and not be able to pay it. And so that can be a real challenge to folks. And you mentioned investment grade bonds like Apple would be the gold standard, right? Just paying a little bit more than U.S. Treasuries. What is the average, though, for investment grade bonds? So from Apple to anything triple B. So a lot of times people talk about a spread to treasury. And what that means is by paying the government, they can raise taxes, they're never not going to pay you back. But there is a risk

to a company to not pay you back. And so in order for an investor to purchase a corporate bond over a treasury, they have to be compensated extra because there is a little bit of risk, might not be a lot, but there's some risk above zero that this company could default. So effectively, every corporate bond is a little bit more than a treasury. So if you think about a AAA rated bond and the treasury is paying 4.5, they may pay 4.5. A AA bond, maybe 4.7. And so as you kind of, you'll get lower and lower credit rating, you start to see kind of these averages creep up and up. And so that when you get to call it the high yield bonds, those are paying, call it 8%. And so I think that's generally the way we think about these different levels of risk pay effectively certain amounts above the treasury.

And so low risk ones may only pay 1% above their treasury. High risk ones may pay 5% above a treasury. And so as rates, treasury rates go down, these yields will also go down. But the difference between the treasury rate and the corporate bond rate should remain constant. So to actually answer your original question, these bonds are generally paying about 2% on average more than treasuries. Okay. And so we're ideally staying in the universe of investment grade bonds, not necessarily junk bonds, but just for funsies, what would junk or AKA high yield, AKA non-investment grade bonds be going for? What kind of rates are you seeing there?

So the safer ones, because there is a range even within the junk space, the safer junk bonds, I would say, are earning, call it, 7% to 8%. And the really risky ones, right, could be anywhere from 20% to 40%. But those are that high because of other issues that we've talked about. But generally speaking- What's an example of one of those? AMC is a great example. AMC bonds are paying 15 to 20% at the moment. And what kind of risk would you expect with a company like AMC? What if you're like, I love movies and it's a meme stock and 20% sounds amazing. But what realistically

is the risk that somebody could expect if they bought a corporate AMC bond? It's a good story. AMC is a very specific company because of its meme status. So on the one hand, the company is not doing that great, right? Not many people go into the movies. Profits really aren't there. They don't have much growth potential. So that's why the bonds are trading very low because people are like, not a great company. On the other hand, because they're a meme stock, they're able to raise a lot of capital in the equity markets. And this goes back to if they're raising a bunch of money in the equity markets, that adds a buffer between the debt holders and the company. And so it makes their bonds safer.

So in AMC, it's actually been like a little bit of an awkward effect that doesn't happen in the market just because their stock is pumped so high that they can raise equity for really, really cheap, you know, compared to their debt. And we delineated between investment grade and non-investment grade. There's also secured bonds and unsecured bonds, right? Can you explain the difference? So secure bonds are generally backed by some asset. So for instance, if you have a mortgage, right, that is a bond that is a secured bond, because if you default, they can claim your house and sell the house. So it is secured by something. Whereas many bonds of corporations, right, when they issue it, it's just backed on,

hey, is this company going to do well or not? And so secure bonds can be very good, right? If they're backed by government revenues, for instance, a lot of municipal bonds, which we haven't talked about much, right, a lot of municipalities issue bonds to fund stadiums or schools or things like that. Those are often secured because there's some tax base that is literally funding, you know, these bonds behind the scenes. And so that's the difference between secured and unsecured. Secured generally has some type of asset that you can claim under a default, whereas unsecured is, hey, this company defaults.

You just have to go through the bankruptcy court and see what shakes out at the end. And there's a creditor list if something like that happens. Is there a way to get your money back? There is a way to get the money back. And that's a very good point, I think, and the major difference between bonds and stocks and why bonds are much less risky than stocks. Because in most bankruptcies, and it's funny, who actually triggers a bankruptcy? The bondholders. So that's, I think, that's an interesting part, right? So bondholders, everyone's worried about, hey, they're going to

default. But bondholders are the ones that are saying, hey, I'm looking at this company. I'm getting worried they're not going to pay me back. I'm going to trigger a default to make sure I get my money back. But when that happens, all the equity holders, all the stockholders pretty much get wiped out. And so you're left with all these bondholders saying, hey, we know this company worth something. We know we're owed something. We want to take all of our money back. And so they go through the courts. The company sells off everything they can, right? They're left with a bunch of assets. And then the bondholders say, okay, I have the first claim to those assets in order to get paid back.

And generally speaking, even when companies go bankrupt, bondholders get 70, 80, 90 cents on the dollar back because they're the ones first in line saying, hey, you got to default because you got to pay me back right now because I don't trust you to pay me back in a year or two. And so that's why bondholders actually are relatively low risk because even in the event of a default where stockholders get written down to zero, bondholders actually get a fair amount of their money back. And they're always at the top of the stack? Like in any creditor situation, even personal bankruptcy, you'll have people that get paid first if there's any money retrieved. Every bond is ahead of every stockholder,

but it doesn't mean that every bond is first in line because they could have multiple debt and you could be somewhere on the line. You just know you're above the equity holder. But some bonds are first in line. Some are last in line. It's specific to the individual bond. So if I'm thinking about buying a corporate bond, is that something I want to take a look at? Obviously, take a look at the rating, take a look at whether or not it's secured or unsecured. What else would I want to know? I think the thing that we haven't talked about is your time horizon. So we look about what is the maturity date on this bond? If it's a risky company, but they're going to pay you back in three months, maybe it's not that risky.

If it's a risky company, but they're scheduled to pay you back in 30 years, right, that's a little bit more of a wager that you might want to make. And so I think one of the big things is what is my time horizon and how much time do I want to give this company to pay me back? Because it can be a risky bond. But if it's only a one year bond or a two year bond, you know, the risk is not as great as if it were a longer bond. So one of the ways that investors can, the risk is not as great as if it were a longer bond. So one of the ways that investors can reduce their risk and still earn high yields is keeping their maturity short because that just reduces the future time period for that company to run into trouble. Hold on to your wallets. Money Rehab will be right back.

One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a time checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte and how I am still very fired up about it.

If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime feels like progress. Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A. Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply.

Go to Chime.com slash disclosures for details. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high-quality local co-hosts with Airbnb experience that can take care of your home and your guests.

Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work. I always want to line up a reservation for my house when I'm traveling for work. But sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host.

And now for some more money rehab. Some bonds might be callable too, right? Can you explain that? Yeah. So a lot of bonds in the corporate space are callable. And what that means is that it is an option for the issuer to basically say, hey, you know, we knew, we originally said this bond was going to mature in five years. After two years, we're allowed to pull all those bonds back for a certain price. And so it is an option that the issuers can place on this bond when they issue it that increases the yield because it's a benefit to the issuer, which is a negative for the bond holder. So bond holders get higher yields for callable bonds. But there is this risk that they buy a bond and they expect to hold it to maturity.

But all of a sudden, the company says, hey, no, I'm going to call that bond back, give you your money back right now, as opposed to the maturity date. And so the risk to investors is, hey, you think you lock in a guaranteed yield for five years. I locked in, right, 5% for the next five years. I'm super happy. In two years, right, that company could call it. I get my money back, which is great, but now interest rates are 2%. So I'm like, now I don't have my 5%. Now my best thing is 2%.

And so callable bonds can create this, can create a risk where you get called and then your other opportunities are not as good as they were when you originally purchased the bond. You still get your money back. It's not a horrible event. It's just you didn't, you expected to have that yield for a bit longer than you got. And why would a company call a bond? So when just, I think it's a good analogy is the mortgage, the mortgage space. So when rates were going down, people were able to refinance, right? I have a 6% mortgage rate. Oh, I can refinance into a 3% mortgage rate. I'm going to do that, right? That's going to result in lower costs to me. And there are not really

many penalties in the mortgage space. So that's the easy trade to me. And it's the same thing with corporations. Corporations can issue bonds when yields are high. And then when yields are low, they want the flexibility to basically turn those high interest loans into lower interest loans, right? They want the ability to refinance, right? Just like a mortgage owner. And so in effect, this is just them putting in this provision that says, hey, if our rates go down this far, I'm allowed to call this bond. And so it's just protection from the issuer that if rates go down, far, I'm allowed to call this bond. And so it's just protection from the issuer

that if rates go down, they want the flexibility to call these bonds back and reissue new bonds at lower rates. Let's holistically look at an offering. Let's say we're going shopping. Sam, I see the rating. I see a maturation period, which is when this thing is over, the yield, which is how much money I'm going to get back. How should I assess picking a bond? I pick it potentially based on my time horizon, or I'm just dipping my toe in the water. So I pick a shorter one with a high rating and good enough spread from a treasury that I'm getting a little bit more than a U.S. treasury. But then what happens? So I think in the bond world, there's not, the way we think about it in the stock market, you got to get the story right. You got to make, you got to, Tesla's going to go to the moon,

right? That's a good story that got to go right. In the bond world, it's not necessarily if a company has to do something right. It's what could go wrong. So do I trust this company to continue to make profits over the coming years, which is a slightly lower hurdle, because the ability for a company to pay you back is a lot more probabilistic than this company 10xing over the years as a concern for a stock market investor. For most bond investors, I think the general math is, hey, do I want to take risk or not? And that determines kind of the credit rating that they're going to limit themselves to, right? Do I want AAA? How far down the rating, risk rating, do I want to go? If you want to take some risk, maybe you venture slightly into the high yield, maybe you don't. And then it's the maturity, right? How long do I potentially want to lock

up this money for? One year, two years, three years, 10 years, 20 years. And then I think a lot of it is what is the yield, right? If I'm looking at 10 different bonds and there's different characteristics and they're all kind of the same, I'm just going to pick the one that's going to give me the highest yield. I trust all these companies. I don't really know exactly the differences between them, but the yields are all the same. So let's just pick the highest one. And I think to your point, I think what we found in public when we launched our offering is it's a very challenging question of the 1.5 million bonds. What do I choose?

And so I think a lot of people shy away from bonds because that is a tough question. And so one of the things we've done in public is we've just created a bond account that says, hey, don't worry about picking your own bonds. We have a little simple screen on the back end, it's going to come up with 10 bonds that are diversified, that are paying throughout the year, that are relatively high yielding bonds, and that you don't really have to think about these things. And so I think another thing with bonds is that diversification works just as well as it does in the stock market. You don't want to pick one bond, put all your eggs in one basket and call it a day, because you can buy five bonds, 10 bonds, 20 bonds, diversify across credit ratings, companies, maturities, and create your own basket of income producing securities that is really bespoke to you.

And whether those are corporate bonds, whether those are treasuries, whether it's a mix, or I think kind of what we've done is say, hey, if you don't want to go through all the hard work, here's kind of one simple account that gets you broad, diversified access all in one easy click. Because we know people don't want to dig into the financial statements, dig into bond prospectuses. It's a lot of work. And totally, it's a lot of work to keep track of when they come due. What happens then? Is it a regular income tax situation that you get from corporate bonds? Corporate bonds, yes, they are unfortunately taxed at ordinary income levels. Generally, how these things work, you buy a bond for $100, it'll pay you income twice a year. And then at

the end of it, it'll pay you your $100 back. So the income that you get over the life of the bond is taxed at ordinary income rates throughout the life of the bond, just like a bank account. So you would buy the $100 at a discount and then get the $100 back? You'd buy it for $100. Every year they pay you $5 in two increments, right? $250, $250. Next year, $250, $250. Next year, $250, $250. And then at maturity, you get your $100 back plus your final interest payment. So government bonds, you get your $100 back plus your final interest payment. So government bonds, you mentioned this when we were talking about callable bonds, are obviously impacted by interest rates. To what extent would you say corporate bonds are affected? Obviously, it would influence whether or not they would want to call their bond back.

But what else? So the Fed has a very immediate and direct effect on short-term cash rates. And so if you think of treasuries, three-month T-bills, six-month T-bills, they're immediately impacted by a Fed cut. Treasuries 10 years out, 30 years out, they're maybe a little bit impacted. 10 years out and 30 years out is so far that it's hard to say, hey, what the Fed does today really impacts those. It's kind of a similar thing in the corporate bond world, and even to a lesser extent. So short-term corporate debt still much more impacted than long-term corporate debt to rate decreases. But even because of this difference between the spread to treasury, a lot of times the spread will widen as treasury rates falls, and corporate bonds will be less impacted by rate declines. But I still would expect as overall

rates in the market to decline, all rate products, right, whether it's corporate bonds, whether it's auto loans, mortgages, you kind of see a decreasing trend just given what the Fed is doing. So it's not a guarantee, but likely all rates will decline in this environment. So we're likely to see the Fed lower interest rates next week. Would we expect the same thing to happen in the corporate bond world, just everything to go a little bit lower? A lot of people forget that you can invest in bonds and get pretty good price appreciation. Because as most folks understand about the bond world, as interest rates go down for bonds, bond prices go up. So if you own a bond, you're still getting that regular income. But if you're looking at your account statement every day, you might see the price of your bond going up too.

And so I think that an interesting way to actually realize what's happening is at the beginning of this year, the 10-year treasury was only offering 4.4%. Everyone's like, why would I sign up for 10 years at 4%? But as rates have gone down, the 10-year treasury rallied an extra 6% in price. So the 10-year treasury is up 10% this year. And that's actually pretty good. And so I think, you know, as rates have gone down, people have been getting ahead of it and buying bonds in anticipation of rates going down and trying to pick up this price appreciation that happens as interest rates go down. And so we'll continue to see that happening over the next six to 12 months. You know, people will see a little bit extra pickup in their bond accounts because they're getting a little bit more price appreciation as these interest rates go down.

I'm glad that you brought that up because it's another seesaw situation, the price and the rate. I think it might be easier, and I want to put you on the spot to do an example for how that price appreciation would look like just basic math, 100 bucks bond or something like that. Sure. So if we go back to the example, hey, interest rates are 5%. I buy a bond at 100 and you're going to pay me 5% a year, right? Pretty simple math. Overnight, the Fed drops the rate. All of a sudden rates are 4%. And you said, hey, yesterday, right, I paid $100, you know, to get 5%. In this market, right, I can only get 4%. So yesterday, you're going to pay me $100 for 5%. How much do you have to pay me for 4%. And so you have to pay them a little bit more.

And I think on the flip side, if rates go up to 6%, hey, I was only earning 5% on this bond, no one's going to give you 100 bucks for it anymore, because they can go out and get 6%. So now your $100 bond isn't worth 100 bucks bucks. It might only be worth $95 because things have changed. And as the current investor, you see your bond price go up and down because the income you're getting is fixed. And so the only other thing to change is the price of this bond, right? So if you're getting a fixed amount every year, the bond price has to compensate for the change in interest rate. Because if you were getting 5% and now the interest rates are 2%, you own a very good piece of paper. So you're not going to give that up for 100 bucks anymore because you're the one

getting 5% when everyone else is getting 2%. So it's actually much more valuable and worth much more than $100. Can you sell them? Yes. Early that's it. Yeah. So you can sell them early. And that's another reason why the prices rise, because the whole market's saying, hey, you're earning 5%. I really want that. And you're like, all right, I'm not going to sell to you for 100. Will you give me 104 for it? And they're like, sure, that's still a good deal, because I can only get 4% in alternatives. And so it's really all about what are your other opportunities at the time you're buying that bond. And what else should people keep in mind as big differentiators between corporates and treasuries?

Are there any other weird quirks and nuances? So taxes are a big one. If you do live in a high income state, you probably do run around the tax math because you might be paying up more in taxes than you otherwise would have. Certainly, treasuries are the lowest risk. Long term, no one's going to retire on cash. Treasuries are pretty much just cash. It's going to be very hard to generate returns, long term attractive returns in treasuries or cash. And so I think you do have to, if you're not just protecting capital, you're not just having

emergency savings. If you have long return goals, five years out, 10 years out retirement, corporate bonds allow you to take more risk and allow you to increase your return above and beyond treasuries, then it actually makes sense to have in your portfolio. It may not make sense to have treasuries in your retirement account, but it could make sense to have a little bit of corporate bonds paying 6%, 7%, 8% to offset some of the volatility in your stocks. And so I think for what we're

saying, corporate bonds can fit a bunch of different investor types in this environment. On one hand, we've seen investors plow so much money into high-yield savings account, which are great, right? Everyone's sitting on huge piles of cash earning 5%. Amazing. What happens when rates drop, right? What do you do then? Those folks could, right, find opportunities in the corporate bond markets, continue earning those higher yields with relatively low risk. I think, and similarly, on the other side of the coin, the stock market has ripped for the past five, six, seven, ten years, right? Folks might be looking at their stock point and saying, hey, I have so much in growth techie stocks, how do I basically take some risk off the table?

Similarly for those folks, right? Taking some money and off the stock market table and putting them into, right, relatively attractive corporate bonds or in a steady yield could be a good way to prepare for, right, who knows what's coming, right? If there are some wobbles in the stock market ahead. Bonds, I think, have been a core holding for institutions, pension funds, right? Very large investors. And I think retail investors are just starting to appreciate how to use these things in their portfolios. Yeah. When you think about bonds, you think about boring, basic. First of all, I love my money being boring and basic. I don't want to do crazy, sexy stuff. But of the bond world, the corporate bonds are probably the sexiest if you do it right.

Bonds in general, horrible marketing, right? Horrible marketing. They're boring. People don't want to touch them, right? It's for people who are retired. It's for, right? It's not for me. I want, right? The Tesla's, the NVIDIA's, I want stocks. But no, I think as more people start to, you know, understand kind of the risks in the stock market and the risks of, right, just owning stocks, bonds are becoming very attractive. And I think folks are trying to catch up to what are these things? How do I buy them? Which ones do I buy? Where can I buy them? And so I think that's what we're trying to provide. And there are also corporate bond ETFs.

100%. ETFs are a perfectly acceptable way to access the bond market. There's an ETF for every different slice of the bond market, right? There's the whole bond market, but you can just get the junk market. You can just get, right, the technology junk, right? Just like ETFs can carve up the stock market, they carve up the bond market. The one thing they do come with, you know, recurring fees as always. And two, I think a lot of our investors are buying individual bonds because they want to lock in that yield, right? When you buy an individual bond, you're guaranteed a set of payments. You're guaranteed a return from that point on. But if you buy an ETF, the manager is constantly changing the bonds. And so there's never this final end date. And so if you really, if you have a house that you're

going to buy in three years, I'm gonna buy a three year bond, I know for a fact, they're going to pay me back in three years, and I'm going to get a guaranteed return if they fulfill their obligations. An ETF is kind of just more open endedended and you don't get that finality. And so if you want to lock in the rate right now and guarantee yourself a return, individual bonds are the way to do that. But if you are just looking for general kind of bond exposure, ETFs are also a great way to play with this space. So Sam, at the end of all of our episodes,

we close by asking our guests for a tip that listeners can take straight to the bank. I know you can't give financial advice, but can you share one thing that you've done personally that has helped your financial picture with corporate bonds specifically or just in general? So I, like many other folks, have been sitting on a lot of cash, right? There's no better place to get a high attractive yield than a high yield savings account. And that's been true for the past year. Earlier this year, I did start to take a little bit of that money off the table and said, hey, I know lower rates are coming. How do I capitalize on that? I'm going to increase my duration. So I actually did start to buy bonds

in call it the three to five year space, because I felt that was an attractive place for my money. And I was able to continue earning right these five to 6% yields and lock those in for three to four years because I know that opportunity is not going to be around for much longer. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynew Money News Network for exclusive video content.

And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.