Principles Of Bond Portfolio Creation

In creating a bond portfolio, an investor normally aims to obtain high income, to preserve principal and possibly to earn an attractive total return (the sum of income, reinvestment income and price change). Achieving these objectives requires careful attention to risk and taxation. The following discussion lays out the basics in each of these areas, with the caveat that I do not provide advice on tax matters. At the conclusion of this article are three specific recommendations in the corporate bond category, valid as of August 19, but subject to revision or revocation thereafter.

Types Of Risk Faced By Bond Investors

As a general rule for bonds, the higher the income (the greater the yield, in other words), the greater the risk you must take. Bond risk comes in several varieties: