Unlike investing in stocks or high-yield corporate bonds, investment grade corporate bonds are relatively safe securities. Unlike investing in CD’s and other money market instruments, they offer a relatively high return. Backed by solid ratings and powerful financial foundations, investing in corporate bonds is a way to make money at a desirable pace. Poor market conditions however, may signify a bad time to invest in even the strongest investment grade bonds.
What are Investment Grade Corporate Bonds?
Corporate bonds with high ratings are considered investment grade. Ratings are determined by independent private firms, with Moody’s, Standard and Poor’s, and Fitch being the main three providers. Both corporate and municipal bonds are subject to this rating system to give investors an idea of the credit worthiness of a company or institution. Standard and Poor’s, for example, labels high-quality investments as either AAA or AA, medium level, but still considered investment grade bonds, are A or BBB.
Corporations given stellar ratings are generally strong, dynamic, successful businesses. General Electric and Citigroup are examples of issuers with high ratings for their debt. Governments may also back bonds of certain companies to minimize the risk involved and to help attract investors. Because of a higher yield than very safe investments such as Treasury bonds, investment grade corporate bonds are ideal for investors who can afford some level of risk.
There is risk however. Bond ratings can be downgraded, which would lower the value of the investment; federal interest rates can rise, which would also cause the investment value to decrease; and, the company could still default on their debt. in this case, secure and general obligation bondholders are entitled to the assets of the company. Investors who purchased subordinated, and other lower levels of debt are entitled once the other bondholders are paid.
Make Money Investing in Funds
It is also possible to make money investing in investment grade corporate bond funds. In a mutual fund of this nature, a set of investors would pool their money to invest in various low-risk companies. In this scenario, any risk from one company is buffered by the security of another. Another benefit is the expertise of a professional fund manager deciding what the best investment strategies are to meet the expectations of the fund’s investors. Also, unlike buying individual corporate bonds with specific maturity dates, bond fund investments can be sold back to the mutual fund at any point.
There is still risk involved. During poor economic times, many corporations may have trouble maintaining excellent credit, causing values to drop and corporate bond mutual funds to take losses. Over time, they are likely to regain those losses, but for some investors, time is an issue. Also, consider the fees to be in the fund and sales commission rates to determine what net profit may look like.
When Corporate Bond Investing is Right
Corporate bond investing is right when it is time to diversify an already established portfolio. It is a way to bring in an extra source of fixed income for a relatively low risk. In bad economic times, be capable of taking losses and waiting for returns. In strong economic times, be willing to put finances into investment grade corporate bonds and make money.