Free Investment Advice

Ask any investment professional which type of investment is best, and he will tell you that it depends on a number of factors. The amount you have to invest, the length of time you wish to invest your money, and your tolerance for risk all have a bearing on which investments are best for you. And the state of the economy plays a role in determining the best investments, too.

Among those who are new to investing or have never invested, corporate bonds have gotten a rather bad rap. It’s true that they can be very risky, but they can also garner good returns in some cases. And if you buy when interest rates are high and sell when they are low, you can make money without having to wait until the bond matures.

How Corporate Bonds Work

Corporate bonds are securities issued by companies that need to raise money. Instead of taking out a business loan, they sell bonds to investors. This is good for the company because they have a longer term in which to repay the loan, and good for investors because they receive interest until the principal is paid in full.

Bonds are rated by Moody’s and Standard and Poor’s. The higher their rating, the lower the risk to the investor. But bonds with high ratings also have lower interest rates because of their low risk. Bonds with lower ratings are riskier, but they also carry higher interest rates.

Like the interest rates of most other investments, the interest rates of bonds fluctuate with market interest rates. But once a bond is issued, its interest rate remains constant for the entire term. So if you buy a bond with a 5% interest rate and the rate of bonds issued by the same company subsequently jumps to 8%, you still only get a 5% return. Conversely, if you buy a bond with a 10% interest rate and the rate of bonds issued by that company later falls to 6%, you still get your 10% if you keep the bond until it reaches maturity.

As you can see, the best time to buy bonds is when interest rates are high. Not only will you get a higher return than you would with a lower interest rate, you can also sell the bond and make a profit when interest rates are lower. Investors who are interested in bonds but turned off by low interest rates can buy from a bondholder with a higher interest bond to get the returns they want.

When the economy is shaky, interest rates fall. So buying bonds directly from corporations is usually not a good idea. If you’re dead set on getting into the bond market, buying from an investor with a higher interest bond will provide better returns. But your best bet is to wait until the economy improves and interest rates rise.