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Buy Ford Bonds

With the recent rise in interest rates, Ford Motor Company's (NYSE:F) long term bonds have begun trading at yields above 8% to maturity. Currently, the spread between the 2032 and 2097 maturity is quite negligible, but even at 8+% returns, I have serious concerns regarding Ford's short-term outlook that make me hesitant towards making an investment.

buy ford bonds

Ford is following the example set by many other U.S. companies that have stepped up sales of green bonds this year. Corporate green bonds marketed in the U.S. have raised $58.6 billion in proceeds in 90 offerings so far this year, more than double the total from a year ago when green-bond issuance totaled $28.7 billion in the U.S., according to Refinitiv, a data provider. During the same period in 2019, green-bond issuance totaled $22.4 billion.

Ford Motor Company (NYSE:F) is one of the most popular companies in the stock market. A lot of investors have very high expectations of the company as things have been improving in North America and Europe, in addition to the strong growth figures we are seeing in Asia. In the recent years, Ford also brought back its dividends, which makes the company an even more attractive investment opportunity. Meanwhile, the company's stock performance in the last decade is far less than impressive. Exactly 10 years ago, Ford's stock price was $15.70, which indicates that the company's share price has appreciated by less than 1% annually, on average, in the last decade. If Ford's stock price has a tendency to stay flat in the long term and many investors are attracted to the company because of its dividend yield, maybe a subset of those investors would be better served by investing in Ford's bonds rather than the Ford stock.

When investors buy bonds of a company, they become debt-holders of the company. In the event of a bankruptcy, debt-holders enjoy precedence over shareholders because a company has to honor its debt before paying anything to its shareholders. As a result of this, many people consider bonds to be somewhat more secure than stocks even though this is not always true. Bond prices are highly-dependent on interest rates and they can fluctuate as much as stock prices over time.

Ford is buying back much of the $8 billion in bonds the company issued at the start the coronavirus pandemic at lofty yields of between 8.5% and 9.625%, according to Ford Treasurer Dave Webb. It's also repurchasing some older bonds at similarly high yields in hopes of upgrading its credit rating, which lost its investment-grade status in March 2020.

Ford expects to fund the buyback with cash on hand, which totaled about $31 billion to end the third quarter. Webb said a $1 billion or more "green" bond could follow as part of a wider effort to "aggressively restructure" its balance sheet under its Ford+ turnaround plan. He said the company is looking to issue 10-year bonds that pay between 3.5% and 4.5%.

Ford Motor Company (F 2.52%) said that it has issued three series of high-yield bonds, raising a total of $8 billion, after reporting that it lost $2 billion in the first quarter with its factories shuttered amid the coronavirus pandemic.

The range of corporate bonds issued each year allows investors to tailor a bond portfolio around their specific needs. The various types of corporate bonds offer different risk levels, as well as varying yields and payment schedules.

Fixed-rate couponsThe most common form of corporate bond is one that has a stated coupon that remains fixed throughout the bond's life. It represents the annual interest rate, usually paid in two installments every six months, although some bonds pay annually, quarterly, or monthly. The payment amount is calculated as a percentage of the par value, regardless of the purchase price or current market value. With corporate bonds, one bond represents $1,000 par value, so a 5% fixed-rate coupon will pay $50 per bond annually ($1,000 5%). The payment cycle is not necessarily aligned to the calendar year; it begins on the "Dated Date," which is either on or soon after the bond's issue date, and ends on the bond's maturity date, when the final coupon and return of principal payment are paid.

Investment grade vs. non-investment grade (high yield)Corporate bonds are generally rated by one or more of the three primary ratings agencies: Standard & Poor's, Moody's, and Fitch. These firms base their ratings on the bond issuer's financial health and likely ability to make interest payments and return the bondholders' principal. Rated bonds fall into one of two categories: investment grade or non-investment grade (also known as high yield). Investment grade bonds are considered to be lower risk and, therefore, generally pay lower interest rates than non-investment grade bonds, though some are more highly rated than others within the category. Non-investment grade bonds are considered to be higher risk or speculative investments. The higher yield reflects an increased risk of default. A company's financial health can change, and when it does, its bonds' ratings may change as well. So an investment grade bond could become non-investment grade over time and vice versa.

Zero-couponZero-coupon corporate bonds are issued at a discount from face value (par), with the full value, including imputed interest, paid at maturity. Interest is taxable, even though no actual payments are made. Prices of zero-coupon bonds tend to be more volatile than bonds that make regular interest payments.

Callable and puttableThe issuer of a callable corporate bond maintains the right to redeem the security on a set date prior to maturity and pay back the bond's owner either par (full) value or a percentage of par value. The call schedule lists the precise call dates of when an issuer may choose to pay back the bonds and the price at which they will do so. The callable price is generally expressed as a percent of par value, but other all-price quotation methods exist.

Variable- and adjustable-rateVariable- and adjustable-rate corporate bonds are similar to floating-rate bonds, except that coupons are tied to a long-term interest rate benchmark and are typically only reset annually.

Convertible bonds*Convertible bonds can be exchanged for a specified amount of the common stock of the issuing company, although provisions generally restrict when a conversion can take place. While these bonds offer the potential for appreciation of the underlying security, prices may be susceptible to stock market fluctuations.

ChoiceThe range of corporate bonds issued each year allows investors to tailor a bond portfolio around specific needs. Investors should, however, consider that each issuer has its own unique risk profile.

Secondary marketAn active secondary market exists for many corporate bonds, which creates liquidity for investors. Investors need to remember that some issues can be thinly traded, which may impact pricing and may pose a challenge when selling.

New issuesCustomers are able to access new issue corporate bonds through the CorporateNotes ProgramSM. Each week a limited number of new issue corporate bonds are available for purchase at par, in minimum denominations of $1,000, without additional mark-up.

RatingsMost corporate bonds are rated by at least one of the major rating agencies. Fidelity offers both investment grade and non-investment grade bonds, which are classified according to their rating. When considering an investment in corporate bonds, remember that higher potential returns are typically associated with greater risk.

YieldsCorporate bonds are among the highest yielding fixed income securities. In fact, the yield differential over Treasuries may be great enough to outpace inflation over the long term. Because interest is fully taxable, buyers should evaluate their tax situations before investing.

When investing in corporate bonds, investors should remember that multiple risk factors can impact short- and long-term returns. Understanding these risks is an important first step towards managing them.

Market riskPrice volatility of corporate bonds increases with the length of the maturity and decreases as the size of the coupon increases. Changes in credit rating can also affect prices. If one of the major rating services lowers its credit rating for a particular issue, the price of that security usually declines.

Make-whole callsSome bonds give the issuer the right to call a bond, but stipulate that redemptions occur at par plus a premium. This feature is referred to as a make-whole call. The amount of the premium is determined by the yield of a comparable mature Treasury security, plus additional basis points. Because the cost to the issuer can often be significant, make-whole calls are rarely invoked.

Step-up coupon If your Corporate Note has a step-up coupon schedule, the interest rate of your Corporate Note may be higher or lower than prevailing market rates. Generally, a step-up Corporate Note pays a below-market interest rate for an initial defined period (often one year). After the expiration of that initial period, the coupon rate generally increases, and the Corporate Note will pay this interest rate until the next step, at which time it changes again, and so on through the maturity date. Holders bear the risk that the step-up coupon rate might be below future prevailing market interest rates. Because step-up Corporate Notes typically include call provisions, holders also bear the risks associated with callable bonds. In this regard, it is important to understand that if your Corporate Note is called, you will not benefit from the interest payment(s) of the later step(s). The initial rate on a step-up Corporate Note is not the yield to maturity. You receive the yield to maturity (YTM) only if you hold the Corporate Note until maturity (i.e. it is not sold or called). Please review the step-up schedule and call information found in the coupon and attribute columns of the search results page or in the Statutory Prospectus. 041b061a72

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