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How Safe Are Corporate Bonds?

Many companies use two ways to raise the money required for business growth. The way in which they do this is through issuing shares or issuing bonds. With shares you become a part owner of the company but with bonds you become a lender to the company. Corporate bonds are one of the main ways for them to raise capital. The question arises: just how safe are corporate bonds?


As with all bonds, corporate bond prices are sensitive to universal fluctuations in interest rates. Standard & Poor's, Moody's or Fitch rate most bonds. Any with a rating of BBB or higher are considered to be investment grade. Those rated lower would be considered as a "junk bond." The higher the rating the lower the rate of return the issuer can offer. While an investment-grade corporate bond may still default you can be more confident in its ability to repay its debt.


Ratings can be used to help you make better investment decisions and they allow investors to compare the financial strength of each company. A poor credit rating indicates a higher risk that the company will default and you will not get your money back as promised. The benefits of credit ratings are that they are widely available and offer a simple measure of risk. A low credit rating does not necessarily mean you should ignore the company but it does indicate that caution is warranted.


Investment-grade corporate bonds are suitable for investors seeking income and for conservative investors who want a higher yield than would be available with government or treasury bonds. They also add diversification for the more aggressive investor. These bonds are considered very safe investments, and they pay slightly higher yields than government bonds


At the end of the day corporate bonds are only as safe as the company in which you invest. Read annual reports to learn about the company's cash reserves, their outstanding debt and profit projections. Look for realistic responses to economic changes. Do they adjust in times of economic downturn?


As with any investment corporate bonds vary in the degree of safety that they offer the investor, and nothing is guaranteed. The corporation issuing the bond guarantees the bond, but the safety of the investment depends largely on the credit worthiness of the company. Municipal and government bonds will have a higher rating than a corporate bond and they offer lower income opportunities as a result of the lower risk. Corporate bonds are safer than shares as they have preference over share holders in the event that the company fails.


When considering investing you should think of your own personal circumstances, your desire for risk, your personal strategies for investing, and the current market conditions. The final decision will be yours and you can only use the tools available to assess the safety of corporate bonds.


If you have any query regarding this then consult with the experts at CL King and Associates. CL King has acted as Co-Manager for bond offering for many reputed companies such as Walmart, Charter Communications, Southern California Edison and many more. 
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