Before investing in corporate bonds, it is important to understand the factors that influence bond prices and their security being an investment.
What to See Before Investing in Corporate Bonds
The important factors that you should consider when investing in bonds include:
- Government bonds are support by full faith and credit of the US government. Unfortunately, some corporations go out of business every year. Even the companies that are thought to be vibrant and successful are not free from economic downturns. Corporate bonds are supported by a company’s assets. If a company is in financial crunch, bond holders could be at risk. High yield or junk bonds are such corporate bonds that return an investor a higher yield compared to other types of bonds. These bonds are at a higher risk of default, which is why an investor is compensated with a greater yield.
- A grading system decides if a bond is either investment grade or under investment grade. This is not foolproof but this grading system manifests some visibility into a corporate bonds security and a company’s rapport. Non investment grade bonds are riskier than investment grade bonds and with the lower anticipated risk; the bond yields are lower also.
- Another factor that can influence a corporate bond, irrespective of the company’s overall financial health is its interest rates. If interest rate hikes, then existing bond values will drop. This is not only applied on corporate bonds, but almost on all bonds unless they have specific features associated with them. While this rise in interest rates may not influence the value of a bond if it is held to maturity, it can reduce the price and it could fetch in the secondary market. The secondary market is a place where sellers and buyers of bonds sell and buy bonds before their maturity date.
- One more factor when analyzing risk is whether you are opting for individual corporate bonds or corporate bond funds. Corporate bond funds do not have a maturity date while Individual corporate bonds have a maturity date. When bonds mature, the capital amount is repaid to the investor and interest payments stop.