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Two ways to check a corporate bond out before you buy

by , 30 May 2014

Corporate bonds are no different from any other type of investment you make. You need to do a bit of research to ensure you're making a sound investment decision. So what sort of checks should you conduct on a corporate bond? And how can you check whether a company can afford to pay back your money? Let's take a closer look…

Corporate bond check #1: The business of the company

Before you think about buying corporate bonds, you need to have a look at the company’s business itself.

Do you understand what the company does?

Do you think the company will still have a viable business and the money to pay you back in ten years’ time, or however long the bond term is?

If you answer yes to both of these questions, move onto check number two.

Corporate bond check #2: The interest payments

The most important thing you should worry about is the company’s ability to pay you interest on the bonds you own. The best way to work this out is to look at the how much money the company makes.

It all comes down to finding out if the business is profitable enough to pay its interest liabilities, Phil Oakley in Money Week explains.

The best way to check this is to calculate the bond’s interest cover. You can calculate this as follows:

Interest cover = Operating profit/total interest payable

Generally speaking, the higher the number you get for interest cover, the safer the bond is.

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Investing in corporate bonds tends to mean buying large amounts of bonds at a considerable expense. If you want to invest in bonds, chat to your stockbroker.

If you’d rather have someone else do all the hard work, then look at one of the bond unit trusts available to invest in.

So there you have it, two ways to check a corporate bond out before you buy.

Two ways to check a corporate bond out before you buy
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