How to Buy Corporate Debt

Major corporations often raise money by issuing debt in the form of bonds.

One way to invest in corporations is the purchase of corporate debt. This is normally done by purchasing bonds. Compared with stocks, bonds are less volatile and less risky, but usually offer lower returns.

Things You'll Need

• Your financial records
• Money to invest
• A brokerage account or an account with a bond broker

Instructions

1. Decide how much money you would like to invest and what percentage you would like to invest in bonds. Most investment professionals recommend a mixture of stocks and bonds and an increasing percentage invested in bonds as you get older. This is because bonds are more stable investments, with much smaller one-year declines, while stocks earn higher returns in the long run.

2. Decide whether you would like to buy individual bonds or a bond fund. The individual bond market is divided into the primary and secondary market. Primary offerings are hard for individuals to get into so most individuals invest in the secondary market. Most bonds are sold in the over-the-counter-market. Bond funds, mutual funds that invest in bonds, represent a way for individual investors to obtain a diversified portfolio of bonds for a low initial investment.

3. Check the rate of return. The reason you are investing money is to make a profit in the form of interest. The price of U.S. treasuries, or the risk-free rate of return, as it is called generally acts as a benchmark. It is called a risk-free return because the U.S. government is presumed never to default on its obligations. Corporate bonds will almost always have a higher yield than U.S. treasuries. Investors should seek the highest amount of return possible for the lowest possible risk.

4. Check the ratings of the bond or bonds you wish to buy. Bonds are rated by the three credit rating agencies, Moody's, S&P and Fitch. They range from AAA to C or D. The ratings indicate how likely a company is to default. On the low end of the spectrum you have junk bonds. While lower-rated bonds offer a higher yield, investors take a greater risk when investing in them.

5. Make a purchase. Purchasing corporate bonds can usually be done through either a discount or a full-service brokerage. If you have $5,000 to invest you can open an account with a bond broker. Bond funds can also be purchased through a brokerage.

Tips & Warnings

• Retail notes allow corporate bond investors to buy bonds in smaller increments.

• It is possible for corporations to default on their bonds. If a corporation goes bankrupt, the bondholders will get paid before stockholders, but they still stand to lose money.

• Brokers will often claim that there is no commission on a bond purchase, but they mark up the cost of the bond, which is essentially the same as a commission.

References

• Investopedia: Bond Basics: How Do I Buy Bonds?
• Registered Rep: Corporate Debt Goes Retail
• SIFMA: Bond Basics
• CNN Money: Resolution 2: Invest smarter