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When companies are looking to raise funds required to grow their business, they can issue bonds and shares. With bonds, you will become a lender to the company, whilst if you purchase shares, you will then become a part owner of the company. The main way for a company to raise capital is through corporate bonds, but how safe are they?
With the universal fluctuations in interest rates, corporate bond prices are sensitive to this. Anything with a rating lower than B B B are considered as junk. Whereas, BBB or anything higher, are considered as an investment grade bond.
The issuer can offer a lower rate of return if the bond has a high rating. Corporate bonds have an ability to repay its debt, however, it can still default.
Comparing the financial strength of each company and allowing investors to make better decisions, ratings can help make a considerable difference. A good thing to look at is the credit rating of the company.
This is because it indicates a high risk of not receiving your returns – even when they are promised to you. However, do not ignore the company if it has a poor credit warning, just understand that caution is warranted.
If you are looking for a higher return than what the treasury or government bonds are offering, or even for an investor seeking an income, corporate bonds can be the answer. They pay slightly higher yields than an average bond and are considerably very safe.
To conclude, however safe the company that you are investing into is, that’s how safe your corporate bonds are. It is advised to look further into the yearly reports of a company.
The outstanding debt the company carries, their projected returns and cash reserves. When investing, always consider your strategy, personal circumstances, the current market circumstances and your desire for risk. In the event of the company failing, corporate bonds have preference over share holders and that’s why they are considered safer.
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