Why is this Topic Important to Wealth Managers? Today we continue our series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation. That being said each blogticle resumes discussion from the previous day.
The dream of the asset manager is to generate high returns (like those available through equity positions) while at the same time providing guaranteed payments through avenues such as debt obligations. Nevertheless, as was discussed in the beginning of this series, the risk/reward model can help determine what investments may work best in today’s economy. Any wealth manager who believes however that bonds have no risk has their head in the sand. All investment actions, including inaction, involves risk in its purest form. For that is essentially the theme of what we learned in Econ 101—“Opportunity Cost”. Even corporate debt can be defaulted upon, and has been recently noted tax-free bonds too face danger of default. Thus risk of default should be considered as one factor among many when determining asset allocation.
It is important to thoroughly understand the financial statements of corporations which are issuing debt. It has been seen that the rating agencies such as Moody’s and S&P have failed investors in the past. Personal responsibility is one key to financial success. Therefore wise wealth managers will complete a diligent analysis of the financial position of a corporation before recommending that position to a client. As one commentator notes, “[a] strong balance sheet can be even more a source of strength and competitiveness in a recession than during a boom.” 
One important consideration in this area is the debt to equity ratio. Generally in the corporate world, the “expected debt to equity ratio varies depending on whether markets are bullish or bearish, whether the economic sector to which a company belongs is more sunrise or sunset, or indeed on whether a company is in an early development phase or at maturity.” 
Generally, interest that accrues after the date of purchase of a corporate bond is included as ordinary income in the year in which it is received or made available. 
For additional information on the taxation of bonds see TaxFacts: Bonds.
For additional information on financial statement evaluation see Advisorfyi.com: Understanding Financial Statements with Warren Buffett.
Tomorrow we continue our series with U.S. government investment.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
Series Author: Benjamin Terner
 Les Nemethy. Debt Versus Equity in Today’s Financial Climate.http://ezinearticles.com/?Debt-Versus-Equity-in-Todays-Financial-Climate&id=2381584. Last Accessed 5/31/11.
 Treas. Reg. §1.61-7.