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Want to invest in corporate bonds? Here's how to weigh up how risky they are…

by , 16 February 2015

When you invest in government bonds, the chances of you not receiving the cash back is relatively low. If governments experience money troubles, they have the option to print more cash or raise taxes.

But with bonds from corporations, it's a different story. Different companies will have different levels of risk associated with whether they can pay back what they owe on bonds or not.

So how can you check?

Read on to find out…

When you buy bonds, you take on credit risk

The main risk of investing in corporate bonds is the issuer may not pay the interest payments or repay the bond amount back to you. This is credit risk.

Credit risk is a very important aspect to consider, especially with longer-term bonds.

And just because a company is big, it doesn’t mean there’s no risk of default. Companies can and do go bust.

The good news is you don’t have to try to work out the credit risk associated with different corporate bonds. Credit ratings agencies do this for you, like Standard & Poor’s and Moody’s.

Have a look at the table below which shows you how the ratings work for these two credit ratings agencies…

Table of main credit ratings grades

From looking at the table above, the very best quality bonds are the ones with the AAA/Aaa ratings at the top of the list. This means they’re of the highest credit quality and the issuer has a strong ability to meet obligations.

As you go down the list, the rating of credit quality decreases and the risk of default increases.

What this means for you investing in corporate bonds

If you’re looking to invest in a bond fund, you should look at the credit risks of the corporate bonds a fund invests in.

If a fund is investing in a lot of bonds with higher credit risks, your potential returns may be higher, but so are your risks.

But if you look at a unit trust’s fact sheet, you should be able to work this out quite quickly. There will be a list of holdings. And these fact sheets also detail the risk associated with investing in them.

So there you have it. If you want to invest in corporate bonds, how to weigh up how risky they are.

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Want to invest in corporate bonds? Here's how to weigh up how risky they are…
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