Comparison of Corporate Bonds

Investors seeking to compare corporate bonds have a number of factors to consider. Two of the top priorities are generally risk and yield. Additional factors in the comparison can include the basic types of available bonds, such as debentures, mortgage and variable rates, as well as what stipulations the contract contains as it relates to the corporation's management. For example, the investor needs to know up front if the bond is callable, if the corporation operates under a sinking fund and if the bond is convertible.

Compare Types

Among the basic types of corporate bonds available, the most commonly issued are called debentures. This type of bond, backed only by the creditworthiness of the issuer, has no pledged collateral to secure it. A mortgage bond, on the other hand is issued for a project or expansion and generally has specific property of the corporation pledged as collateral. A third type of corporate bond is the variable rate, with interest rates adjusted periodically. Treasury bonds are often used as a benchmark to adjust the rates on variable rate corporate bonds. Knowing the types of bonds corporations offer helps in the comparison.

Contract Provisions

A thorough comparison between different corporate bonds requires knowledge of the various stipulations in the contract of the bond. Corporations that issue bonds may have a sinking fund clause, which requires the company to retire a certain portion of outstanding bond issues each year. Generally, in this case, bond issues will be callable, meaning the corporation can force the buyer to sell the bond back before maturity. Another provision in the contract may label the bond as convertible, meaning the buyer can, at his discretion, trade the bond for a predetermined number of shares of common stock. Knowing the contract provisions of comparable bonds can assist the investor in choosing the ones that suit their investment philosophy.

Risk

One of the most important factors to consider in the comparison of corporate bonds is risk. Investors have variable levels of risk tolerance and seek to match that level of tolerance with securities that fit individual goals. Several rating agencies regularly post risk assessments, based on the creditworthiness of the issuers. The lowest risk bonds are called high-grade investments and as the risk level rises, the grades decrease. At the bottom are junk bonds -- too risky to be called investment grade -- the security of junk bonds is unpredictable.

Yield to Maturity

Income, the purpose of investing in bonds, is a significant factor to consider in comparing corporate bonds. Because of the competitiveness in the bond market for investors' dollars, yields are generally comparable across the board on bonds with similar maturity dates. As most investors know, the higher the interest rates in the general market, the lower the yield on older corporate bonds with fixed interest rates. Factoring in how long you are willing to hold a bond will help in comparing the yield to maturity among various corporate issues.

References

• Boston College; Money, Banking and Financial Markets; Peter N. Ireland
• "Finance: Investments, Institutions, Management"; Stanley G. Eakins; 2005
• "Kellogg Insight"; Treasury Debt and Corporate Bond Rates; Arvind Krishnamurthy, et al.; November 2007
• U.S. Securities and Exchange Commission: Bonds, Corporate

Resources

• "Bloomberg Businessweek"; Corporate Bond Spreads Rise... Sapna Maheshwari, et al.; February 2010