Bondholders or Bond Investors are entitled to receive a fixed interest rate on set dates and fixed payment of principle on a definite date. The flaw primarily lies in the fact that principle and interest payments made over time are made with dollars of diminished value eroded by inflation. How can one secure safety of their principle, when inflation is perpetually eroding the income stream and principal value?
Furthermore, bondholders interest payments are taxed at ordinary income vs qualified dividends which are taxed at the much lower long term capital gains rate.
And finally, in the event of insolvency and default, the theoretical advantage of bondholders holding the highest claim in the capital structure clashes with the practical application of receivership which most often leads to significant pain for the bondholder seeking to recoup battered assets in a timely manner.
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