Diversifying your portfolio with Medium-Term Corporate Bonds
E*TRADE from Morgan Stanley12/22/23
Summary: There are several benefits of diversifying your portfolio with Medium Term Notes or MTNs. Learn more about whether this fixed-income security could make sense for you.
Note: Please reference risk factors and disclosures at the end of this piece.
When it comes to building a portfolio, diversification can be an important strategy that helps your investments weather market ups and downs. While diversifying portfolios often includes allocating a portion of your investments to fixed-income securities, you can also diversify within your fixed-income holdings. Medium-term corporate bonds or notes (MTNs) are one type of fixed-income security that could make sense for some portfolios.
What is MTN?
Medium-term notes are a type of corporate bond with a maturity that generally falls between 5 and 30 years. When you purchase a corporate bond, you’re essentially making a loan to the issuing company, which they promise to pay back at a specified rate over a set period of time. Financial services companies, telecommunication firms, and auto manufacturers, as well as enterprises in a variety of other industries offer MTNs.
Unlike some other types of corporate bonds, companies can “continually offer” MTNs through a program set up to raise money to fund their day-to-day operations or to pay for investments in the company.
MTNs typically have a longer offering period than other types of corporate bonds, so investors may have more time to evaluate an offering and decide whether it makes sense for their portfolio.
Like all bonds, MTN issuers promise to pay the investor interest at a specified interest rate over the life of the bond and to return the bond principal at maturity.
While diversifying portfolios often includes allocating a portion of your investments to fixed-income securities, you can also diversify within your fixed-income holdings. Medium-term corporate bonds or notes (MTNs) are one type of fixed-income security that could make sense for some portfolios.
MTNs may make sense for investors who want the basic benefits of fixed-income investments. There are several benefits of incorporating medium-term notes in your portfolio. These include:
- Portfolio diversification, as some investors may consider MTNs, and other corporate bonds, as being more conservative than other types of investments, such as stocks.
- Flexible structures, with both fixed and variable rates available.
- A simple purchasing process, with straightforward pricing at par on new issues without a premium or discount.
- Lower risk than high-yield bonds as the majority of MTNs are investment-grade quality.
- A multi-day offering period, which gives you time to make an educated decision.
You can purchase MTNs directly through E*TRADE’s Bond Resource Center (login required):
- Use the screener to see available corporate bond offerings.
- Refine your search by selecting ‘New Issue’ in market type.
Product Features and Risk Factors
Key product features investors should know about include:
- MTNs in the new issue market can be purchased at par value.
- Most MTNs have a maturity of 15 to 30 years, but the maturity can be as short as one year.
- There are both callable and non-callable versions of MTNs. A call option allows the issuer to redeem a note before its stated maturity.
- MTNs can have either fixed- or floating rate coupons, and their payment frequency can vary, with payments issued on a monthly, quarterly, or annual basis.
There are several risk factors with medium-term notes or MTNs including:
- Notes are not guaranteed by the FDIC or any other governmental agency.
- Notes are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer the bond’s maturity, the more sensitive it is to this risk.
- Government regulation may affect the priority of the notes in the case of a bankruptcy or liquidation.
- Notes can be subordinated to existing and future secured indebtedness.
Investors can trade MTNs in the secondary market though liquidity can be limited depending on the issuer’s credit rating, market conditions, amount outstanding and other risk factors. There is typically a liquidity discount applied to pricing when MTNs are sold prior to their maturity date when compared to bonds of the same issuer with similar rating and maturity. As such, there is no assurance that a resale market will develop or be maintained or what the market price will be.
How can E*TRADE from Morgan Stanley help?
View available Medium Term Note offerings
Explore and review active MTN offerings within the Bond Resource Center.
Individual bonds and CDs
Explore over 50,000 bonds from 200+ leading providers. Most bonds and certificates of deposits (CDs) are designed to pay you steady income on a regular basis.