“How safe are investment grade corporate bonds?” is often a question investors ask. Now for those new to the game, investment grade bonds are assessment made by a corporation or a municipality to measure the ability of a borrower to return the investment. In any lending company, a bond is a debt security wherein the issuer repose on the holders an amount of debt and an interest depending on the terms of the bond. It is a formal contract in which the borrower agrees to pay the money with an interest at a definite interval that can either be semiannual, annually or in some cases monthly. It is also an agreement wherein the borrower can pay the lender at a later date which is called maturity.
Since a bond is essentially money borrowed, the bond issuer has credit rating standards. These classifications are further subdivided into different categories depending on the credit rating. In the evaluation, the better the company’s credit rating, the lower the interest that will be implemented. This means that it is a less risky loan but the lower the company’s credit rating, the higher the interest; because of the risk of exposure.
So How Safe are Investment Grade Corporate Bonds?
The answer is that they are relatively safe. These bonds are suitable for investors who are looking for income and for conservative investors who are seeking for a higher output than those offered by the treasury bonds or the government. They also encourage diversity in aggressive investors who are willing to lend their money while earning a slightly higher return than those bonds issued by the government. It is also safer than investing individually because you are at risk of losing everything. In order to assure that you are entering a safe bond, it is important that you consider the following:
How to Make Sure your Investment Grade Corporate Bonds are Safe
1. Before investing in corporate bonds, you must make sure that you truly understand what bond you are entering. You must also read the prospectus thoroughly and understand everything including the terms and conditions and the amount you have to pay annually.
2. Since these bonds are issued by companies, you must make sure that the companies are secure are stable by conducting a little research on the company. Look through the company’s annual report and if possible, check their product brand recognition in the marketplace.
3. If you keep your bond until maturity, you will be able to get all your money back. But if not, be cautious with the fluctuation that may affect the worth of your investment. This means that it may be worth more or less than the amount you paid it for. If an interest rise is expected, the price of the bond drops and so, if the interest rate drops, the price of the bond rises.
4. Find the perfect timing in investing. Invest in the company when yields are of high value and people are expecting inflation. When inflation drops unexpectedly, your bond becomes more valued.
5. Lastly, you must monitor investment trends by keeping an eye on Government’s fiscal policy, and the relation between the money market and the stock market.
In conclusion, I want to state categorically that investment grade corporate bonds are safe depending on the company you are investing in. You must also acknowledge the fact that investing is less risky if you are financially intelligent or you have basic investing knowledge.
But all the same, investment grade corporate bonds are safer than acquiring shares in the company because there is no doubt in shareholder preferences if the company fails. You will also be expecting higher returns from buying these bonds because unlike government bonds, you will not be paying for the extra protection that they offer.
It is therefore important that you read the company’s annual report to have an idea about their cash reserves, debts and profit projection. After all, how safe are investment grade bonds depend on how much risk you can take and your level of financial IQ.