Investing in corporate bonds is a great way to establish a steadily growing amount of wealth in any portfolio, presenting an investment option that carries little risk and has the potential to generate consistent though modest returns over time. Investing in corporate bonds does require making some choices regarding which bond issues to purchase, and which ones to avoid. When considering any type of bond issue, it is important to look closely at the bond rating, evaluate the bond terms, and also the overall financial condition and prospects of the bond issuer.
A basic tip with investing in corporate bonds is that no matter how attractive the issue appears on the surface, looking into the fortunes of the issuing company is essential. Find out all you can about the financial stability of the issuer, and the prospects for continuing stability for at least the duration of the bond issue. This sometimes means considering not only the ability of the issuer to remain competitive within its industry, but also the prospects for that industry in general. For example, if the fortunes of the business are tied to a flagship product that could become obsolete within the next five years, and you are considering a ten-year bond issue, it may be wise to look at other investments.
Bond terms are also important when investing in corporate bonds. One of the first points to consider is the amount of return the bond will generate, and when that return is realized. The terms may call for settling the entire balance plus interest at the point of bond maturity. Others will issue interest payments at specific points in the bond’s life, finally settling the balance at the point of maturity. Also read the terms to identify which events could trigger rolling the bond into some other type of security, or otherwise result in the bond being called early, since those actions will impact the earnings you receive from the investment.
When investing in corporate bonds, you also want to consider the bond rating. This component is actually helpful in evaluating the current financial status of the issuer. A broker or bond dealer can provide rating information that will help you determine if the bond is a good fit for your needs. Keep in mind that the size of the corporation is not the focus of the rating, and don’t reject a smaller company out of hand simply because it is not well known to you. Lesser known companies often have some of the best ratings and offer the best terms that you can obtain with bond issues.
