The Risk of Corporate Bond Market

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Purchasing a corporate bond has three primary risks attached to it; 1) market risk, 2) industry risk, and 3) company risk. The US corporate bond market has trended lower over the last few years although recently the rates have risen relative to the last year. The market risk is that bond investors will continue to see the same type of rates in US Treasuries as they do in the corporate bond arena and will have no reason to purchase corporate bonds. Last month the corporate bond yield averaged 2.12% and the 10-year average is 2.57%, so it still has a way to go to even get back to its 10-year average. Since it is only a one-year bond that is being considered, the market risk is probably not as high as the industry risk or the specific company risk. Considering the industry risk; the airline industry is not an industry that is considered a safe and secure haven for corporate bond issues, having witnessed a number of bankruptcies and slowdowns, bond investors usually demand higher rates from this industry. As for specific company risk, Southwest Airlines (SWA) has the reputation of a relatively well managed firm, which continues to show a profit albeit a much lower earnings per share in 2011 than in 2012. SWA is still in a growth mode; in 2011 they purchased Airtran and increased their presence into a total of 72 cities. Additionally, the company is repurchasing shares and quickly paying down debt. I would purchase a Southwest 1-year bond with a yield of approximately 5%. The

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