What to Consider Before Purchasing a Corporate Bond

Corporate bonds offer high returns for your investment, but you must consider the risks involved when investing in bonds. Here's what to consider before you purchase a corporate bond.

One of the greatest risks involved in a corporate bond is the possibility of default in payment by the issuer. The rating assigned by authorized agencies based on a rating scale can assess the chances of default. On the higher end of the scale, a better credit quality bond has fewer chances of default. The lower end indicates that the credit quality is poor and the chances of default are greater.

Agencies also consider another risk before assigning the credit rating: sudden rough phases in the issuer’s business. This raises the risk factor and makes the yield higher. The yield on a bond can depend on the industry in which the company operates and the market's position of that industry. The call and put features of a bond also help to determine the risk and return balance of that bond.

Ratings are not the only thing to consider before investing in corporate bonds. For example, some businesses, such as telecommunications or metal industries, often evolve into different companies, making consolidation a frequent occurrence. These changes in the industries increase the risk factor. Avoid investing in bonds of companies where revenue shows a decline and the debt burden is increasing.

Consider your liquidity requirements before investing in corporate bonds. Match your investment horizon with that of the maturity period. If you must sell the bonds prematurely, you may lose yield, and so you should consider the liquidity of the bond.

For more information on this subject, see www.investinginbonds.com.