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Pros and Cons of Corporate Bonds

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by Gavin in Blog
November 16, 2021 0 comments
corporate bonds

Today we will look at the pros and cons of corporate bonds. Let us know if corporate bonds are part of your investment portfolio.

Contents

There’s a relatively good chance that you’ve probably been interested in learning more about corporate bonds.

We are going to take a look at some of the pros and cons of corporate bonds.

One of the benefits is that investors can choose corporate bonds with many different timeframes.

Some bonds mature in the short term, while others don’t mature for many years.

Many investors consider corporate bonds extremely safe investments, although they haven’t always provided the greatest returns.

The process for acquiring corporate bonds is relatively simple.

An investor would have the opportunity to buy individual $1,000 corporate bonds from companies looking to borrow money from investors.

Corporate bonds are usually assigned a credit rating to determine their overall risk.

Similar to how your credit score works, a corporate bond assigned with a high credit rating will generally pay less interest annually than a bond with a low credit rating.

There’s also the possibility of delinquency from bonds that don’t have an excellent credit rating.

It’s generally a good idea for investors to evaluate the level of risk that they’re willing to take on before acquiring any specific corporate bonds.

If you’re looking for low-risk bonds, it’s probably a good idea to look at bonds with a ‘AAA’ credit rating.

Advantages Of Corporate Bonds

One of the most significant advantages that most investors like about corporate bonds is that they are generally less volatile than stocks.

In recent years, corporate bonds have also generated better returns than government bonds, which is a major bonus.

We’ve already discussed the timeframe for corporate bonds a little bit.

Some investors consider the diverse timeframes for corporate bonds to be a significant advantage.

You could acquire a corporate bond that matures in as little as three years or as long as fifteen years.

Depending on what you’re specifically looking for, you could probably find a corporate bond that is appealing to you in this category.

Corporate bonds advantages and disadvantages

Interest rates for corporate bonds are generally pretty good when compared to government bonds.

One unique advantage of corporate bonds is that the interest rate can change after the predetermined call date passes.

In an ideal scenario, the interest rate could go up and generate even better returns for the investor.

One of the final major advantages of corporate bonds is that the high credit rating bonds generally provide investors with very little risk to their financial capital.

While it’s true that corporate bonds with poor credit ratings can be extremely risky, it’s usually not too hard to find a company that is raising money through corporate bonds that has an excellent credit rating.

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PROS – Corporate Bonds: 

  • Corporate bonds are not as risky as many other investments.  
  • You can acquire corporate bonds with very diverse maturity timeframes. (1 – 20 Years)
  • Fluctuating Interest Rates after the call date passes. 
  • High Credit Rating Bonds are extremely safe and reliable for investors. 

Now that we’ve taken a closer look at some of the advantages that come with corporate bonds, it’s time to shift our focus towards some of the reasons you might want to avoid corporate bonds.

We will be taking a look at some of the disadvantages of corporate bonds.

Disadvantages Of Corporate Bonds

The main risk of corporate bonds is the chance of the company going delinquent.

If the company that issues the corporate bonds to get money files for bankruptcy or goes out of business, the investor that bought their corporate bonds could be in major trouble.

There’s a very good chance that the investor will lose their investment into the corporate bond and that you’ll never receive any additional payments at the time of the company’s downfall.

Let’s assume that you stay away from corporate bonds with poor credit ratings.

You can eliminate the risks of delinquency by investing in corporate bonds with excellent credit ratings.

While this can sound highly appealing, one of the facts about investing in corporate bonds is that higher credit ratings for a particular bond usually means a much smaller return for the investor.

Why do corporate bonds with higher credit ratings pay lower returns?

This is because corporate bonds with excellent credit ratings can pay out a much lower interest rate than those with a poor rating.

CONS – Corporate Bonds: 

  • Some corporate bonds are risky and can result in delinquency. 
  • AAA corporate bonds are safer, but they generate less returns.

Investors looking for alternative investment strategies might be interested in diversifying their portfolios to include some corporate bonds.

It’s important to evaluate the risks before making important decisions because every corporate bond has a different risk level.

Final Thoughts – Corporate Bonds

Don’t be afraid of acquiring corporate bonds if you are looking for a safe investment that generally provides reasonable returns for the risk level applied to the investor.

Companies are always looking to borrow money, and generating corporate bonds for public investors is one of the most appealing ways to do this.

While the return rates are not generally the greatest for safe corporate bonds investments, they have proven to be highly reliable in recent years and continue to be one of the most popular bond investments.

Most corporate bonds pay more interest to investors than government bonds, although they are not considered to be quite as safe.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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