Category: 

How do I Choose the Best High-Interest Bonds?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 February 2020
  • Copyright Protected:
    2003-2020
    Conjecture Corporation
  • Print this Article

Choosing high-interest bonds is a task that requires careful consideration of several key factors. One has to do with the financial stability of the issuer and the chances of that issuer remaining stable for at least the duration of the bond issue. Considering the structure of the bond is also important, along with the degree of risk that is involved versus the projected returns that can reasonably be expected from the investment. Only after considering all these factors should an investor make a final decision and move forward with investing in high-interest bonds.

To begin, it is important to assess the type of bond issue involves. High-interest bonds may be structured with a fixed or a floating rate of interest. There may also be provisions for the issuer to call the bond early, meaning that even if the interest rate is very attractive, the investment may not yield the fully projected return. Look closely at the terms and conditions involved with issue, including the bond rates that apply. Base your anticipation for return on the worst case scenario, including an early call or a drop in rates that impact the floating rates associated with the bonds.

Ad

High-interest bonds may be structured to provide investors with periodic interest payments throughout the life of the bond, or provide one lump sum settlement once a given bond issue reaches maturity. Determine which approach is best for your particular needs. Investors who prefer to realize the income incrementally over several accounting periods may prefer to go with high-interest bonds that disburse interest payments quarterly or semi-annually. For investors who want the lump sum payment at maturity as a means of funding a particular project, the one-time payment may be the best option.

With high-interest bonds, it is also very important to look closely at the financial well-being of the issuing entity. Whether that entity is a local municipality or a large corporation, dig into public records to find out just how financially stable the organization currently is. Consider what is likely to happen to that stability between now and the maturity date of the bond issue. If you believe there is a good chance that the issuer will have significant financial problems before then, you may want to consider high-interest bonds currently offered by other organizations.

Keep in mind that there is no one ideal way to structure high-interest bonds that are right for every investor. Look closely at the structure of each bond issue that catches your eye, and project both the most return you can expect from the investment as well as the minimal return that can be reasonably anticipated. By matching the terms of the bond to your own personal preferences, and allowing for changes in the financial stability of the issuer, it is much easier to identify and settle on the high-interest bond issues that are in line with your personal financial goals.

Ad

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email