How to Buy High-Interest Corporate Bonds
When you buy corporate bonds you are loaning the corporation that issued the bonds money. The corporation agrees to pay a set interest rate for the borrowing of your money and the principle amount back (the face value of the bond) after a set amount of time has elapsed (when the bonds mature our are callable). An investor does not have to hold bonds for any set amount of time. Bonds are bought and sold on the open market and their price fluctuates with the rise and fall of interest rates and other factors such as the corporations debt rating. A corporation that does not qualify for investment grade ratings by the credit rating agencies Standard & Poor's, Moody's and Fitch must pay a higher interest in order to attract investors because it is considered a higher risk. When investors buy high interest corporate bonds, they are buying bonds with a higher risk of default.
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Instructions
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Learn as much as you can about high-interest corporate bonds and the bond market. Learn what the bond ratings mean, how often a company defaults and what recourse you have if and when a default occurs. Despite the higher risk, there are some advantages to investing in high-yield bonds. These include a higher income from the high interest rates; the potential for capital gains if the market interest rate declines or the bonds are upgraded by the credit rating agencies; and a higher legal standing than stockholders if the company is liquidated. Disadvantages include the risk of default; price declines from further lowering of credit rating; price declines from rising interest rates; and lower liquidity since a buyer may not exist for the bonds at times.
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Learn as much as possible about individual companies issuing high-interest bonds before investing. Evaluate these companies for yourself to determine if the risk is worth taking. If a company is near bankruptcy, avoid the investment, but if problems appear to be temporary and it is likely the company will turn around, the bonds may be a good investment. Chrysler Corporation sold junk bonds in the 1970s, but turned around and was a strong company in the 1980s and 1990s. There is a lot to consider when investing in high-interest corporate bonds. If a company that issues the high-interest bonds you bought turns itself around, you will be rewarded with higher interest payments, possibly nice capital gains and an increased price for the bonds.
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Develop investment criteria. For example, look for companies that have a tradition of strength, have never declared bankruptcy or that are going through a temporary rough period and are likely to come back strong. Find a reason to invest in a company's bonds, such as a new or improved product coming out or increasing economic indicators that the company will benefit from. Solid research and sound business logic can lead to success with high-interest corporate bond investing.
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Open a brokerage account to buy and sell securities, including high-interest corporate bonds. You simply open and fund an account. As you find the bonds you want to invest in, place your order through the brokerage. The brokerage will charge you a fee for each buy or sell order.
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