The Risks And Benefits Of Corporate Bonds

The Risks And Benefits Of Corporate Bonds



The Risks and​ Benefits of​ Corporate Bonds
Rarely will you​ find an​ investment where you​ gain​ a​ substantial reward without an​ equally substantial amount of​ risk .​
Let's face it​ - the odds are stacked against you​ .​
Not only are there other huge banks and​ multinational corporations you​ have to​ compete against that have more capital than you​ will ever have, but there are millions of​ other investors trying to​ test their luck in​ the same market .​
your​ choice of​ where to​ invest your​ money is​ therefore highly important .​
this​ is​ where corporate bonds come into play.
1 .​
Corporate Bonds
Many times, corporations have great sales and​ service records but just don't have the funds needed for​ a​ particular initiative .​
a​ corporate bond is​ high yield as​ essentially you​ are lending the company your​ money.
2 .​
Credit Risk
of​ course, you​ have to​ consider that many companies seek bonds because they are in​ financial trouble and​ need a​ quick cash injection​ to​ keep themselves afloat .​
It will be up to​ you​ to​ differentiate that companies are looking for​ a​ handout and​ that legitimately have a​ quality operation​ and​ simply need funds to​ expand​ and​ grow their business.
3 .​
Corporate Bond Ratings
Credit risk on​ bonds is​ actually rated in​ an​ easily understandable fashion​ .​
Triple a​ bonds are very low risk, and​ similarly low yield .​
BB is​ considered junk - very risky but potentially insane payouts, all the way to​ D (avoid these at​ all costs).
4 .​
Interest Rates
if​ you​ are going to​ be acquiring a​ bond, of​ the things you​ should look for, the interest rate is​ high on​ the priority list .​
Getting a​ bond with even a​ 1% better rate of​ interest can result in​ hundreds of​ additional dollars in​ your​ pocket each year .​
Since general interest rates can change, a​ bond purchased today offering 5% is​ worth less if​ interest rates in​ general rise to​ 8% a​ year later.
5 .​
Life To Maturity
Many corporate bonds come with the option​ to​ be callable .​
this​ means that they can be redeemed prior to​ the date of​ maturity .​
Companies do this​ when interest rates fall, and​ they wish not to​ continue making high interest payments to​ bondholders .​
in​ essence, this​ is​ a​ form of​ corporate re-financing similar to​ that done by homeowners with their home equity .​
That callable feature represents the risk to​ an​ investor that, though initially receiving high interest payments, they may not be able to​ enjoy that same rate for​ the life of​ the bond .​
As a​ consequence, those bonds are often less expensive and​ have lower interest rates.




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