A corporate bond fund invests in debt issued by companies that need to raise money. Such bonds are rated for their safety by Standard & Poor’s and Moody’s, two companies that specialize in examining the finances of companies and determining whether they are likely to be able to pay off their debts in a timely fashion.
Standard & Poor’s and Moody’s rate bonds using letter grades — S&P’s AAA and Moody’s Aaa represent the highest possible grades. In general, investors want to invest in bond funds that hold bonds rated in the four highest categories: AAA (“triple A”), AA, A, and BBB, according to S&P or Aaa, Aa, A, and Baa, according to Moody’s. The companies that issue these bonds are unlikely to go bankrupt or to fail to repay their debts, so the risk is fairly low. However, corporate bond funds are still slightly riskier than government bonds, so corporate bonds pay slightly better interest to compensate.
One type of corporate bond for most investors to avoid is the so-called high-yield bond, also known as a junk bond. As the latter name implies, such bonds are very risky. They’re offered by companies that are small, sometimes struggling, and prone to great shifts of fortune, either up or down.
Fortunes have been made by high-yield bond investors — and also lost. If you’re offered the opportunity to invest in a high-yield bond fund, examine it cautiously, and only invest money that you can afford to lose. It may happen.
Because investors are wary of high-yield or junk bonds, some brokers or other bond funds salespeople may try to sell you a high-yield bond fund without identifying it as such. If you are offered shares in a bond fund with an interest rate two or three percentage points higher than other funds you are considering, be careful! Chances are that the risk associated with the fund is very high, even if the salesperson doesn’t reveal the fact.
Standard & Poor’s and Moody’s rate bonds using letter grades — S&P’s AAA and Moody’s Aaa represent the highest possible grades. In general, investors want to invest in bond funds that hold bonds rated in the four highest categories: AAA (“triple A”), AA, A, and BBB, according to S&P or Aaa, Aa, A, and Baa, according to Moody’s. The companies that issue these bonds are unlikely to go bankrupt or to fail to repay their debts, so the risk is fairly low. However, corporate bond funds are still slightly riskier than government bonds, so corporate bonds pay slightly better interest to compensate.
One type of corporate bond for most investors to avoid is the so-called high-yield bond, also known as a junk bond. As the latter name implies, such bonds are very risky. They’re offered by companies that are small, sometimes struggling, and prone to great shifts of fortune, either up or down.
Fortunes have been made by high-yield bond investors — and also lost. If you’re offered the opportunity to invest in a high-yield bond fund, examine it cautiously, and only invest money that you can afford to lose. It may happen.
Because investors are wary of high-yield or junk bonds, some brokers or other bond funds salespeople may try to sell you a high-yield bond fund without identifying it as such. If you are offered shares in a bond fund with an interest rate two or three percentage points higher than other funds you are considering, be careful! Chances are that the risk associated with the fund is very high, even if the salesperson doesn’t reveal the fact.
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