Corporate Bond Investing

What is a bond?

Before diving into corporate bond investing, I recommend going to definition of bonds.

What are corporate bonds?

Federal bonds have the highest credit rating available because the chances of them not making interest payments are slim to none. However, their yields are lower relative to the riskier corporate bonds. Corporate bonds have all sorts of credit ratings.

Should I invest in corporate bonds?

I don't recommend directly investing in corporate bonds. I recommend sticking with Vanguard's total bond market index. Its more stable and being relatively stable is the point of buying bonds. Corporations can go out of business. Even corporations with a high credit rating can go out of business - as we saw in 2008.

Corporate bond values are also tied closer to the values of stocks. For example, a bond in Walmart will go down significantly in value at the same time as the stock if Walmart makes a big announcement that will cost them a lot of money or people think they will declare bankruptcy soon.

OK. OK. I get it. I shouldn't invest in corporate bonds explicitly...But lets say I have a "friend" who does want to. How would he invest in corporate bonds?

If you absolutely must get a little risky with your bonds, I would stick with Vanguard. Afterall, it will still be safer more often than stocks. I was extremely tempted to put Vanguard's High-Yield Corporate bond fund into a Roth IRA. With this fund, you're protected somewhat against corporations not being able to pay by diversifying across many companies.

On the other hand, if you look at the value of the fund, you'll see that the fund took a nosedive during October of 2008 - just when the stock market did. So, don't think of this as a bond fund so much as a somewhat risky high yield stock fund.

I wanted to put it in my Roth IRA because 9-10% yields are generally not as tax efficient as growth in share value. For example, if a stock goes up 5% in value, you don't pay taxes on it unless you sell. However, if that stock pays you a 5% dividend, then you will have to pay taxes on that dividend. Therefore, high yielding stocks and bonds are better in tax-sheltered accounts -- like IRA's and 401k's.

return from corporate bond investing to safe investing

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