Investment Grade Corporate Bonds

Investment grade corporate bonds can either be a long term investment or a very short term investment. Many folks compare these types of bonds to government bonds, but honestly they could not be any more off track. The idea is the same, but typically government bonds are a whole lot safer, although in the recent climate that is also rather debatable.

Understanding what you are investing in is important, especially if you really can not afford to lose your principal investment.

Types of Bonds

There are a few different types of investment grade corporate bonds available. For example, say a corporation wants to expand, but they do not want to go to a bank they can sell bonds to their investors to raise equity for expansion. They usually will offer a fixed rate for interest.  These type of bonds are less risky than when you are buying bonds to cover a companies debts for money that cannot raise in any other way. The pay off for the higher risk, you got it, higher yields.

There are convertible bonds that can be converted to stock in the company.  There are investment grade corporate bond vehicles that pay interest out yearly or even quarterly, while there are some that pay no interest until they mature at which point you collect your principal and interest. A good rule of thumb is to pick a investment grad corporate bond that matches your goals.

The Grading System

Of course all of this involves that faith that the investors have in the company that they are purchasing the bonds from. There is a grading system in place that is published by Standard and Poor’s Rating Services and other rating services that offer several ratings too show the likelihood that a company will pay interest payments and will be able to successfully repay their investors.

The rating system runs from AAA which is the highest rating and points to the likelihood that the company is a good investment all the way down to the C rating which is basically the most risky of all investment grade corporate bond. Here is the catch the AAA rated bonds are the lowest paying bonds in most cases while the C rated bonds are the highest yielding, it is simple math really. The C rated companies are going to have the hardest time finding buyers or investors for their bonds so they have to offer higher interest rates, to bring people on board, while the AAA rated companies will have little trouble trying to bring people on board so they can afford to pay lower interest rates.

The grading system is a great jumping off point for anyone that is interested in using these vehicles but it certainly should not be the only consideration.

Knowing the company that you are investing in is just as important, looking at things like longevity, past performance and following your own gut is also important.

Purchasing investment grade corporate bonds is relatively safe, but like any vehicle it is not without risk.