Friday, September 11, 2009

Principal investor in corporate Notes and Bonds

During the 1960s and early 1970s small investor "rediscovered" corporate notes and bonds in their search for higher yields to offset inflation and increased taxes. As the 1970 drew to a close and the 1980s began, however, the interest of small investors in corporate bonds sagged again in the face of soaring inflation and more attractive returns available from money market funds, common stock, real estate, and other assets.
Today, the market foe corporate notes and bonds are dominated by insurance companies and pension funds. The latter prefer buying corporate bonds in the open market, while insurance companies frequently purchase their corporate securities directly from the issuing company in an "off-the market" transaction. The stability of cash flows experienced by pension funds and insurance companies permits them to pursue corporate debt obligations with long maturities and lock in their high market yields. Both federal and state laws, however, require these institutions to be "prudent" in their selection of notes and bonds, which generally means buying investment-grade issues in the top four rating categories established by Moody‘s and standard&Poor‘s Corporation.
Commercial banks are not prominent investors in corporate bonds. Generally, a banker would prefer to deal personally with his business customer and grant a loan specifically tailored to the borrower‘s needs rather than enter the highly impersonal bond market. Increasingly in recent years commercial banks have become direct competitors with the corporate note and bond markets through the granting of term loans. A term loan is any loan granted by commercial bank for business purposes which has a maturity of more than one year. Responding to inflation and the soaring cost of business equipment and facilities, bankers have gradually extended the maturity of term loans with many now falling in the 5- to 10-year maturity range. Rates on such loans generally exceed the interest cost on corporate debt sold in the open market, however, especially when banks insist that the borrowing firm keep funds on deposit equal to a specified percentage of the loan.

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