If you’re looking to diversify your portfolio beyond stocks, corporate bonds are a logical next step. But knowing where to begin can be a challenge. How do you find the right bonds? What do the credit ratings mean? And how do you actually make a purchase? This guide is designed to give you a clear, actionable roadmap. We will walk you through the entire process, from understanding the basic mechanics to developing a sound strategy for your first purchase. Consider this your practical handbook for getting started with corporate bond investments, helping you move from curiosity to confident action in your investment journey.
Key Takeaways
- Balance Your Portfolio with Predictable Income: Use corporate bonds to generate a steady stream of cash flow while also providing a stabilizing effect on your portfolio, especially during periods of stock market volatility.
- Prioritize Credit Quality to Manage Risk: A bond’s yield is your compensation for its risk. Always start by checking the credit ratings from agencies like S&P or Moody’s to understand the issuer’s financial health before you consider its potential return.
- Match Your Strategy to Your Goals: Your approach to bond investing should reflect your personal objectives. A buy-and-hold strategy works well for long-term income, while a bond ladder can help you manage the effects of changing interest rates over time.
What Is a Corporate Bond?
Think of a corporate bond as a formal IOU. When a company needs to raise money for big projects—like building a new factory, funding research, or acquiring another business—it can issue bonds to investors. Essentially, you are lending money to the company. In return for your loan, the company agrees to pay you back with interest over a set period. This makes you a creditor, and it’s one of the most common ways for established companies to secure financing outside of issuing stock.
How They Work
The mechanics of a corporate bond are straightforward. When you purchase a bond, you are lending a specific amount of money, known as the principal or face value, to the issuer. In exchange, the company makes periodic interest payments to you, called coupon payments, which are typically paid twice a year. These payments continue until the bond’s maturity date—the day the loan is due. On that date, the company repays your original principal in full. This structure provides a predictable stream of income, making bonds a foundational element for many investment portfolios.
Types of Corporate Bonds
Corporate bonds come in several varieties, each with its own structure. The most common are fixed-rate bonds, which pay a consistent interest rate until maturity. You’ll also encounter a key distinction based on credit quality: investment-grade versus high-yield bonds. Investment-grade bonds are issued by financially sound companies and are considered lower risk. High-yield bonds, sometimes called junk bonds, come from companies with weaker financial standing. They offer higher interest rates to compensate for the added credit risk. Finally, zero-coupon bonds don’t make periodic interest payments. Instead, you buy them at a deep discount to their face value and receive the full amount at maturity.
Common Myths About Bond Safety and Risk
A common misconception is that bonds are completely safe investments. While they are generally less volatile than stocks, they are not without risk. The most significant is credit risk, also known as default risk. If the company that issued the bond runs into financial trouble, it could fail to make its interest payments or even repay your principal when the bond matures. Another key factor is interest rate risk; if market interest rates rise, the value of your existing, lower-rate bond could decrease on the secondary market. Understanding these potential downsides is the first step toward building a resilient investment strategy.
How to Read Corporate Bond Ratings
Corporate bond ratings are like a credit score for a company. They give you a quick snapshot of the issuer’s financial health and its ability to pay back its debt. Think of it as a standardized grade that helps you understand the level of risk you’re taking on before you invest. These ratings are assigned by independent agencies that do a deep dive into the company’s finances. Understanding how to read these ratings is a fundamental skill for any bond investor, as it directly impacts a bond’s price, its yield, and its overall place in your portfolio. It’s your first line of defense in assessing whether a bond aligns with your risk tolerance and financial goals.
The Major Rating Agencies
Before a company issues bonds, it’s evaluated by independent credit rating agencies. The three most recognized agencies are Standard & Poor’s (S&P), Moody’s, and Fitch Ratings. These firms act as financial detectives, analyzing a company’s financial statements, debt levels, and overall economic outlook to determine its creditworthiness. Their final assessment is a credit rating that signals how likely the company is to meet its debt obligations. While each agency has its own slightly different scale, they all aim to provide an objective measure of risk for investors, making it easier to compare different bond opportunities.
Investment-Grade vs. High-Yield Bonds
Bond ratings are generally split into two main categories: investment-grade and high-yield. Investment-grade bonds are issued by companies with strong financial health and a low risk of default. S&P and Fitch rate these from AAA (the highest quality) down to BBB-, while Moody’s uses Aaa to Baa3. On the other side are high-yield bonds, often called “junk bonds.” These are rated BB+ (or Ba1 for Moody’s) and lower. They come from companies with a higher risk of default, but they typically offer a higher yield to compensate investors for taking on that extra risk. Knowing the difference helps you align your bond choices with your personal risk tolerance.
How Rating Changes Affect Your Bonds
A bond’s rating isn’t set in stone. Agencies continuously monitor a company’s financial health, and ratings can be upgraded or downgraded over time. A downgrade often happens if a company faces unexpected financial trouble, which increases its perceived risk of default. This can cause the market price of its existing bonds to fall. Conversely, an upgrade suggests the company’s financial position has improved, which can increase the market value of its bonds. Staying aware of these rating changes is an important part of managing your bond portfolio and reacting to shifts in the market.
How to Interpret Ratings
At its core, interpreting a bond rating is straightforward: the higher the rating, the lower the perceived credit risk. A bond with an AAA rating is considered to have an extremely strong capacity to meet its financial commitments. As you move down the scale toward BBB-, the risk of default increases, though it’s still considered relatively low. Once you cross into the high-yield category (BB+ and below), the risk becomes more significant. These ratings are a crucial tool for helping you decide if a bond is a suitable addition to your portfolio based on its potential return and associated risk.
Why Invest in Corporate Bonds?
Corporate bonds can play a valuable role in a well-rounded investment strategy. While they might not get the same headlines as high-flying stocks, they offer a unique combination of benefits that can help you achieve your financial goals. Think of them as a versatile tool in your investment toolkit. For many investors, the primary appeal is the consistent income stream they can provide, which can be especially useful for funding life expenses or reinvesting for growth. But their utility doesn’t stop there.
Adding corporate bonds to a portfolio dominated by stocks can introduce a layer of stability, helping to cushion against market downturns. This is because bond prices often move independently of stock prices, providing a valuable diversifying element. Furthermore, when compared to safer government debt, corporate bonds typically offer more attractive yields, compensating investors for taking on a bit more risk. This potential for higher returns makes them a compelling option for those looking to enhance their portfolio’s overall performance. Of course, it’s also important to be aware of how these investments are treated from a tax perspective. By understanding these core advantages, you can make a more informed decision about whether corporate bonds align with your personal investment solutions and long-term objectives.
Generate Regular Income
At its core, a corporate bond is a loan you make to a a company. In exchange for your investment, the company agrees to pay you interest over a set period, and then return your original investment—the principal—when the bond “matures.” These regular interest payments, often called coupon payments, create a predictable income stream. For anyone looking to supplement their salary, plan for retirement income, or simply generate consistent cash flow from their investments, this feature makes corporate bonds an attractive option. It’s a straightforward way to put your money to work and receive a steady return.
Diversify Your Portfolio
You’ve probably heard the saying, “Don’t put all your eggs in one basket.” That’s the essence of diversification. Stocks and bonds often have an inverse relationship; when the stock market is volatile or declining, high-quality bonds can act as a stabilizing force in your portfolio. By including corporate bonds, you spread your risk across different asset classes. This balance can help smooth out the ups and downs of your investment journey, leading to more consistent long-term growth. A well-diversified portfolio is better equipped to handle whatever the market throws its way.
Access Higher Yield Potential
When you’re looking for income, you’ll often compare different types of bonds. Corporate bonds typically offer higher yields—or interest rates—than U.S. government bonds, like Treasury bonds. Why? It comes down to risk. A company, even a very stable one, has a slightly higher chance of facing financial trouble than the U.S. government. To compensate investors for taking on that additional credit risk, companies offer a higher rate of return. For investors comfortable with this trade-off, corporate bonds can provide a more substantial income stream than their government counterparts, helping you reach your financial goals faster.
Understand the Tax Considerations
It’s crucial to remember that the income you earn from corporate bonds isn’t entirely yours to keep. The interest you receive is generally subject to federal, state, and local income taxes. This is an important distinction from some municipal bonds, which can be tax-exempt. Before you invest, you should consider the bond’s after-tax yield to understand its true return. Factoring in these tax implications is a key part of building an effective investment strategy. It’s always a good idea to consult with a financial professional to see how bond income might affect your specific tax situation.
How to Manage Common Investment Risks
Investing in corporate bonds comes with its own set of potential challenges. But by understanding these risks ahead of time, you can build a more resilient portfolio. Thinking through these factors allows you to make informed decisions that align with your financial goals and risk tolerance. Here’s a look at the common risks and practical ways to manage them.
Assess Credit Risk
Credit risk, sometimes called default risk, is the possibility that the company issuing the bond won’t be able to make its interest payments or repay your principal when the bond matures. To manage this, it’s wise not to put all your eggs in one basket. A key strategy is portfolio diversification, which means spreading your investments across bonds from different companies and industries. If one company faces financial trouble, it won’t have an outsized impact on your entire portfolio. Before investing, always review the bond’s credit rating to get a clear picture of the issuer’s financial health.
Understand Interest Rate Sensitivity
Interest rate risk is a fundamental concept in bond investing. There’s an inverse relationship between interest rates and bond prices: if market interest rates rise, the value of your existing, lower-rate bond typically falls. Conversely, if rates fall, your bond becomes more valuable. Bonds with longer maturities are generally more sensitive to these changes. While you can’t control interest rates, you can manage this risk by building a “bond ladder”—a portfolio of bonds with staggered maturity dates. This approach helps you regularly reinvest maturing bonds at current rates, smoothing out the effects of rate fluctuations over time.
Consider Market and Liquidity Risks
Market risk refers to the potential for a bond’s price to fluctuate due to broad market factors. This is especially true for bonds with longer terms to maturity. Alongside this is liquidity risk—the chance you might not be able to sell your bond quickly at a fair price. Some bonds trade less frequently than others, which can make them harder to sell without taking a loss. To manage this, consider the liquidity of a bond before you purchase it. If you anticipate needing access to your capital on short notice, focus on bonds that have a more active secondary market.
Know the Call Provisions
Some bonds come with a feature called a “call provision.” This gives the issuer the right to repay the bond before its official maturity date. Companies typically do this when interest rates have dropped, allowing them to borrow money more cheaply by issuing new bonds at the lower rate. For you, the investor, this means your stream of income stops unexpectedly, and you have to reinvest your capital at less favorable rates. Before buying a bond, always check to see if it is callable. If it is, make sure you understand the call date and price to assess how it might impact your investment strategy.
Factor in Inflation
Inflation risk is the danger that the fixed interest payments from your bond won’t keep pace with the rising cost of living. Over time, inflation can erode the purchasing power of your returns. If a bond pays a 4% coupon but inflation is running at 3%, your real return is only 1%. To address this, you can incorporate bonds designed to handle rising prices, such as Treasury Inflation-Protected Securities (TIPS), into your portfolio. It’s also important to consider your overall investment returns and ensure they are growing at a rate that outpaces long-term inflation trends.
Popular Corporate Bond Investment Strategies
Once you understand the fundamentals, you can start thinking about how to structure your corporate bond investments. Having a clear strategy helps you align your bond holdings with your financial goals, whether you’re seeking steady income, capital preservation, or a balance of both. Different approaches suit different investor needs and market conditions. Some investors prefer a hands-off method, while others take a more active role. Exploring these popular strategies can help you decide which path makes the most sense for your portfolio and long-term objectives.
The Laddering Approach
A bond ladder is a strategy designed to manage interest rate risk and provide a consistent stream of income. It involves purchasing a portfolio of bonds with staggered maturity dates. For example, you might buy bonds that mature in one, two, three, four, and five years. As each bond matures, you can reinvest the principal into a new long-term bond at the end of the ladder. This method helps smooth out the effects of interest rate fluctuations. If rates rise, you can reinvest your maturing bonds at the higher rates. If they fall, you still have your longer-term bonds locked in at the previous, higher rates. This creates a more predictable investment experience.
The Buy-and-Hold Strategy
The buy-and-hold strategy is exactly what it sounds like: you purchase a bond and hold it until its maturity date. This is a straightforward approach favored by investors who prioritize a predictable income stream and capital preservation. When you hold a bond to maturity, you receive the full principal amount back, assuming the issuer doesn’t default. Daily fluctuations in the bond’s market price become less of a concern because you have no intention of selling it early. This strategy is effective for planning future expenses, as you know exactly when you’ll receive your principal and interest payments along the way. It’s a simple yet powerful way to build a reliable income foundation for your portfolio.
Considerations for Active Trading
While the buy-and-hold strategy is passive, some investors prefer to actively trade corporate bonds to capitalize on price changes. This approach requires more hands-on management and a deep understanding of market dynamics. A key factor to consider is liquidity. Unlike stocks, some corporate bonds are not traded frequently, which can make them difficult to sell quickly at a fair price. This liquidity risk can impact your returns if you need to exit a position unexpectedly. Active trading can be rewarding, but it demands careful research into a bond’s trading volume and market depth before you invest.
Effective Diversification Techniques
Diversification is a core principle of sound investing, and it’s just as important for bonds as it is for stocks. Spreading your investments across various corporate bonds can help manage risk. An effective diversification strategy goes beyond simply buying bonds from different companies. It also involves varying your holdings by industry, credit quality, and maturity dates. For instance, holding a mix of bonds from financial, industrial, and utility sectors can insulate your portfolio from a downturn in any single industry. While diversification helps manage risk, it’s important to remember it doesn’t eliminate the possibility of losses.
Methods for Portfolio Allocation
Deciding how corporate bonds fit into your overall investment portfolio is a critical step. Your allocation should reflect your personal financial goals, risk tolerance, and time horizon. Many investors use corporate bonds to balance the riskier, growth-oriented assets in their portfolio, like stocks. For those seeking more control over their income streams, purchasing individual corporate bonds is often preferable to investing in bond funds or ETFs. This allows you to build a customized portfolio tailored to your specific income needs and maturity preferences. Working with a financial professional can help you determine the right allocation for your unique situation.
How to Evaluate a Corporate Bond
Once you’ve found a corporate bond that seems promising, how do you know if it’s a solid investment? It comes down to a few key factors. Looking at these indicators helps you understand the potential return and, just as importantly, the risks involved. Think of it as doing your homework before making a decision. A thorough evaluation will give you the confidence to decide if a particular bond aligns with your financial goals. Here’s a straightforward process for breaking down a corporate bond and understanding what you’re buying.
Analyze the Yield
A bond’s yield is the return you can expect to earn from it. You’ll often notice that corporate bonds offer higher yields than government bonds, but this extra return isn’t free money; it’s compensation for taking on more risk. A company, even a large one, has a greater chance of facing financial trouble than the U.S. government. When you analyze the yield, compare it to similar bonds from other companies in the same industry with comparable credit ratings. If a bond’s yield seems unusually high, it could be a red flag signaling higher risk that you need to investigate further before you invest in bonds.
Assess Credit Quality
Before you invest, you need to know how likely the company is to pay you back. This is where credit ratings come in. Independent agencies like Standard & Poor’s, Moody’s, and Fitch analyze a company’s financial health and assign it a rating. This rating is like a report card that gives you a quick snapshot of the issuer’s ability to meet its debt obligations. High ratings (like AAA or AA) indicate a very strong capacity to repay debt, while lower ratings suggest higher credit risk. Reviewing these ratings is a critical first step in investing in corporate bonds and protecting your principal.
Measure Duration and Interest Rate Impact
The bond market is sensitive to changes in interest rates. Here’s the general rule: when prevailing interest rates rise, the market value of existing bonds with lower rates tends to fall. Conversely, when rates fall, existing bonds become more attractive, and their prices rise. A metric called “duration” measures how sensitive a bond’s price is to these changes. A bond with a longer duration will be more affected by interest rate shifts. Understanding a bond’s duration helps you anticipate how its value might change over time, which is a key part of managing fixed-income portfolios.
Review the Issuer’s Market Position
A credit rating is a great starting point, but it’s also wise to understand the business behind the bond. Companies issue bonds to raise money for things like expansion or new projects without giving up ownership. Take a look at the company’s position within its industry. Is it a market leader with a strong competitive advantage, or is it in a declining sector? A company with solid financials and a clear path for future growth is generally a more reliable issuer. This qualitative analysis adds important context to the numbers and helps you make a more informed decision.
Analyze Price vs. Value
A bond’s market price is what it trades for on a given day, which can be different from its face value (or “par value”). This price fluctuates based on interest rates, the issuer’s creditworthiness, and overall market demand. If you plan to hold a bond until it matures, these daily price swings are less of a concern because you’ll receive the full par value back (assuming the company doesn’t default). However, understanding the relationship between price and value is essential. The bond market basics show that buying a bond below par can increase your total return, while paying a premium above par will reduce it.
How to Trade and Manage Your Bond Portfolio
Once you’ve invested in corporate bonds, the work isn’t over. Actively managing your bond portfolio is key to aligning your investments with your financial goals over time. This involves more than just collecting interest payments; it means understanding where to trade bonds, keeping an eye on costs, and making strategic adjustments as your needs and the market change. A well-managed portfolio can provide a steady income stream and act as a stabilizing force for your broader investment strategy.
At Waterloo Capital, we provide the operational support and tailored solutions that help you manage your investments effectively. Let’s walk through the essential practices for trading and overseeing your corporate bond holdings.
Primary vs. Secondary Markets
When a company first issues a bond to raise capital, it’s sold on the primary market. After that initial sale, the bond is traded between investors on the secondary market. Most individual investors interact with the secondary market. You can buy corporate bonds directly through a broker or through investment funds like mutual funds or ETFs that hold a collection of different bonds. The secondary market provides liquidity, allowing you to buy or sell bonds before their maturity date, which gives you flexibility in managing your portfolio.
Understand Transaction Costs and Fees
Trading bonds isn’t always free. When you buy or sell, you’ll likely encounter transaction costs, which can be structured as a commission or built into the bond’s price as a “markup” or “markdown.” It’s important to understand these fees as they can affect your overall return. Additionally, while many corporate bonds are traded frequently and can be sold easily, some are less common and have lower liquidity. This can make them harder to sell quickly without accepting a lower price. Always consider these costs and the bond’s trading volume before making a move.
Rebalance Your Portfolio
Just like with stocks, diversification is a cornerstone of managing a bond portfolio. Spreading your investments across different issuers, industries, and credit quality levels helps manage risk. Over time, market movements can cause your portfolio’s allocation to shift away from your original plan. Periodically rebalancing—selling some holdings and buying others—brings your portfolio back to its target allocation. This disciplined approach ensures you aren’t overly exposed to any single company or sector, which is a key part of a thoughtful investment strategy.
Plan Your Income Strategy
A primary reason to invest in corporate bonds is for the regular income they provide through coupon payments. Your income strategy should define what you need from these payments. Are you looking for the highest possible yield, or is capital preservation more important? Corporate bonds typically offer higher interest rates than U.S. government bonds because they carry more credit risk. By defining your income goals, you can select bonds with the right balance of yield and risk that fits your financial plan and helps you meet your objectives.
Monitor and Adjust Your Holdings
The bond market is dynamic, and so are the companies that issue bonds. It’s wise to regularly monitor your holdings for any significant changes, such as credit rating downgrades or shifts in interest rates. If you hold a bond until it matures, daily price fluctuations aren’t a major concern. However, if you might need to sell it early, the bond’s market price becomes very important. Staying informed allows you to make timely adjustments, whether that means selling a bond to lock in gains or cutting a position to avoid potential losses.
Helpful Tools for Bond Investors
Making informed decisions is the cornerstone of any successful investment strategy, and corporate bonds are no exception. Fortunately, you don’t have to rely on guesswork. A variety of tools are available to help you research, analyze, and manage your bond investments effectively. From platforms that help you find opportunities to calculators that clarify potential returns, these resources can give you a clearer picture of where your money is going and what you can expect from it. Integrating these tools into your process can help you build a more resilient and well-planned portfolio.
Research Platforms
Your first step in bond investing is finding the right opportunities, and research platforms are designed to help you do just that. These resources provide detailed information on individual bonds and the companies that issue them. You can explore different ways to invest in corporate bonds, whether you prefer to buy them directly or through investment funds like mutual funds or ETFs. A good platform allows you to filter bonds by credit rating, maturity date, and industry, helping you narrow down the vast market to find investments that align with your financial goals and risk tolerance.
Yield Calculators
A bond’s yield is one of its most important metrics, but it can be tricky to calculate on your own. This is where yield calculators come in handy. These simple tools are essential for determining a bond’s Yield to Maturity (YTM), which is the total return you can expect if you hold the bond until it matures. YTM accounts for the bond’s current market price, par value, coupon interest rate, and time to maturity. Understanding a bond’s return with this level of detail helps you accurately compare different investment options and assess their potential profitability before you commit.
Portfolio Trackers
Corporate bonds often play a stabilizing role in a larger investment strategy. Incorporating bonds into an investment portfolio can help balance out the volatility of other assets, like stocks. Portfolio trackers are invaluable for monitoring this balance. These tools give you a consolidated view of all your holdings, allowing you to see how your bonds are performing alongside your other investments. This holistic perspective helps you ensure your asset allocation remains aligned with your risk management strategy and long-term objectives, making it easier to decide when it’s time to rebalance.
Market Analysis Resources
For investors who prefer a hands-on approach, market analysis resources are critical. Many experienced investors choose to buy individual corporate and municipal bonds rather than investing in bond funds, as it gives them more control over their selections. To do this successfully, you need a firm grasp of current market conditions and economic trends. Market analysis resources, including reports, newsletters, and expert commentary, provide the insights needed to evaluate the economic environment and make timely, informed decisions about which bonds to buy, hold, or sell.
How to Start Investing in Corporate Bonds
Jumping into corporate bonds is more straightforward than you might think. It’s a process of understanding the landscape, making deliberate choices, and aligning your investments with your financial objectives. By breaking it down into a few key steps, you can confidently add corporate bonds to your investment strategy. It starts with knowing the cost of entry and finding the right platform to make your purchases. From there, you can begin to construct a portfolio that complements your existing assets and, most importantly, serves your long-term goals. Let’s walk through how to get started.
Know the Minimum Investment
Unlike buying a few shares of a stock, purchasing individual corporate bonds often requires a larger initial outlay. When you invest in corporate bonds, you typically start with a minimum of $5,000, with additional purchases made in $1,000 increments. This is because you are essentially lending a significant amount of money to a corporation. For investors looking to build a diversified portfolio of individual bonds, this means you’ll need substantial capital to buy bonds from several different companies. If this initial amount seems high, don’t be discouraged. There are other accessible ways to gain exposure to corporate bonds, such as through bond funds, which we’ll cover next.
Choose the Right Broker
Your path to purchasing corporate bonds will lead you to a brokerage firm, but you have a couple of options on how to invest. You can buy individual corporate bonds directly through a broker, giving you control over the specific companies you lend to and a predictable interest payment schedule. Alternatively, you can invest through funds like mutual funds or exchange-traded funds (ETFs) that hold a basket of corporate bonds. This approach offers immediate diversification and professional management, which can be a great option for those who prefer a more hands-off strategy. The right choice depends on your investment capital, how involved you want to be, and your overall financial plan.
Build Your First Portfolio
One of the primary reasons to include corporate bonds in your financial plan is for the balance they can provide. Adding bonds to your investments can help make your overall portfolio more stable and less prone to the sharp swings often seen in the stock market. Because bonds and stocks often react differently to economic events, bonds can act as a stabilizing force when equities are down. When building your first bond portfolio, you don’t need to overcomplicate things. A simple strategy could involve starting with a diversified bond ETF or a few individual, high-quality corporate bonds from established companies to anchor your portfolio.
Set Clear Investment Goals
Before you buy your first bond, it’s crucial to know what you want to achieve. Are you seeking a steady stream of income to supplement your salary or fund your retirement? Or is your main priority preserving your capital with lower-risk assets? Many investors use corporate bonds to make their investment portfolio safer, especially as they get closer to retirement. Your goals will directly influence the types of bonds you choose. For example, an investor focused on income might select bonds with higher yields, while someone prioritizing safety would stick to investment-grade bonds from financially sound companies. Clearly defining your objectives is the foundation of a successful bond investing strategy.
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Frequently Asked Questions
What’s the main difference between owning a corporate bond and owning a stock? Think of it this way: when you buy a stock, you become a part-owner of the company. Your potential for profit is tied to the company’s success. When you buy a corporate bond, you are acting as a lender. You’ve loaned the company money, and in return, they’ve promised to pay you back with interest. Your role is that of a creditor, not an owner.
Is it better to buy individual bonds or a bond fund? This really comes down to your personal preference and goals. Buying individual bonds gives you more control; you know exactly when you’ll be paid interest and when your principal will be returned at maturity. A bond fund, on the other hand, offers instant diversification by holding many different bonds. It’s managed for you, but since the fund is always buying and selling bonds, its value can fluctuate and it doesn’t have a set maturity date.
If bonds are considered “safer” than stocks, can I still lose money? Yes, it’s possible to lose money. The two most common ways this happens are through credit risk and interest rate risk. Credit risk is the chance that the company runs into financial trouble and can’t pay you back. Interest rate risk affects the bond’s market price; if you need to sell your bond before it matures and interest rates have gone up, your bond’s price will likely have gone down.
How do I know if a bond’s yield is good? A “good” yield is always relative. The key is to compare it to other bonds with similar credit ratings and maturity dates. If a bond is offering a yield that seems significantly higher than its peers, it’s often a signal of higher risk. You should investigate why the company needs to offer a higher rate to attract lenders before you decide to invest.
What happens if the company that issued my bond goes out of business? If a company declares bankruptcy, bondholders are in a better position than stockholders. As a creditor, you have a higher claim on the company’s assets. During the liquidation process, the company’s assets are sold off to pay its debts, and bondholders are paid before stockholders. You may receive all, some, or none of your original investment back, depending on the company’s financial situation.