Corporate Bonds Rates: An Overlooked Investment Instrument

Corporations, both domestic and international, issue corporate bonds in order to raise funds for the business in exchange for paying interest to bond purchasers. For many companies who do not want to go public due to complexity involved, bonds are a great way to gain access to capital.

Corporate bond rates are quite attractive, as they offer higher return when compared to savings account and certificates of deposit rates. While bonds are considered a safe investment, corporate bonds always carry a risk of loss, as business may go bankrupt, experience downturn, or become acquired by another entity. These risks are evaluated by independent agencies that assign ratings to companies, issuing corporate bonds. Commonly, the lower the rating the higher the corporate bond rates are.

There are a number of things to consider when investing in corporate bonds: bond rating, maturity period, interest rate, and, if you may consider buying foreign corporate bonds, currency exchange rate.

Bond rating is an indicator of the financial strength of the organization. Bonds ratings vary from AAA (most secure) to C (high risk) and are assigned by independent agencies, such as Moody’s or S&P. Typically, bonds with higher rating feature lower ROI, as they pose less risk of default, and vice versa. However, there may be a difference in corporate bond rates within the same risk group, which investors may take advantage of.

Maturity periods differ greatly, and may be as short as several days and as long as 10 years. Maturity period affects both, the interest rate and the possible risk. Long-term bonds feature higher interest rates, but also pose more risk, as many things may happen over an extended period. While long-term investment into high-rated bonds is usually very secure, high-risk bonds should be carefully evaluated before being considered for investment. If you feel attracted by corporate bond rates of lower-rated companies, always perform due diligence, and try to go with shorter terms to avoid potential risks.

Interest rates are affected by almost everything: company rating, bond maturity period, industry prospects, overall economic climate, and many others. Regardless of above, corporate bond rates should be significantly higher than the rates on CDs and Treasury Bonds; otherwise, they lose their attractiveness to investors and are not worth the risk.

Currency exchange risks should only be considered if you intend to invest in bonds of foreign companies. While those may offer more attractive terms compared to domestic bonds, your earnings may be diminished if foreign currency exchange rate goes down. Unless you are well versed in the areas of global investments and finance, it is better to avoid the hassle of investing into foreign economies.

Overall, corporate bonds have two great advantages. First, corporate bond rates by far exceed the interest rates on traditional bank savings while being a rather safe investment. Second, they are less volatile when compared to stocks, which seem to be quite unpredictable lately. Corporate bonds are easy to buy, whether you do it through your broker, bank, or directly from the corporation that issues them.