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How do I Choose the Best Investment-Grade Corporate Bonds?

A. Leverkuhn
A. Leverkuhn

When it comes to selecting the investment-grade corporate bonds that work best for any investor, the process will include understanding the nature of bonds, looking at competitive options, and testing an “investing philosophy” that includes these investments in corporate debt. When finance professionals talk about a “debt security” or “debt based investment,” they are often talking about investment-grade corporate bonds, which are a popular way for cash holders to gain interest related income and grow their wealth. Both individual investors and larger commercial and institutional entities often invest heavily in bonds, and it pays to think carefully and make the right decisions about the bonds that will fit into a bigger short or long term investment plan.

First, investors need to think about what “investment-grade” really means when applied to different types of bonds. The main types of bonds on the market are corporate bonds and municipal bonds. Corporate bonds are based on the debts of corporations, and municipal bonds are based on the debts of municipalities. Corporate bonds are generally assumed to be a bit more risky than municipal bonds. In either case, an investment-grade bond is one that has been rated by ratings agencies as a safer, more stable bond, where another class of bonds, “junk bonds,” are rated as riskier: junk bonds have a higher chance of defaulting, but generally come with higher interest rates in order to make up for the lender or investor’s additional risk.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Also, with investment-grade corporate bonds, as with any other kinds of bonds, the investor has to look practically at how likely it is that the backer of the bond will default. Obviously, there are lots of options for a corporation with debt, involving refinancing and different types of loan modifications. Still, there is a chance for investment-grade corporate bonds to default, and doing in-depth research can help the individual investor know the risks before plunging into these types of debt securities.

Another very good tip for choosing investment-grade corporate bonds is to test the assessments of ratings agencies independently. In recent times, financial journalism has shown how the professional opinions of the big ratings agencies, Moody’s, S&P, and Fitch, can be erroneous in some cases. The single investor should look critically at what the ratings agencies are saying to hedge against bond related risk.

Beyond these fundamental strategies with investment-grade corporate bonds, investors should also pick bonds that complement other investments. This means diversifying into different sectors, holding different company bonds, and generally making sure that default on one bond will not have an extreme adverse effect on total invested capital. Investors can also look at where the bond issuing companies are located, and whether the bonds are offered individually or as part of various collective “bond funds.” Taking a more detailed look at bond opportunities can help potential buyers choose the optimal setup for growing their money.

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