Safety checks for corporate bonds

Fsp Invest, 17 Oct. 2013

Tags: bonds, corporate bonds, investing in bonds, safety checks, interest cover,

Just because bonds appear safer to invest in than shares, it doesn't mean you shouldn't do your research. You need to ensure you make an informed decision before you jump in. Read on to find out what safety checks you need to carry out on corporate bonds...

Like every investment, you want to make sure that you will be able to sleep at night if you buy a corporate bond, Phil Oakley in MoneyWeek explains.

A corporate bond is a way that a company can borrow money from investors. Instead of going to a bank, a company may choose to issue bonds that can be traded on the stock exchange.

What to consider before investing in bonds

So what safety checks do you need to carry out?

It’s always a good idea to look at what the business issuing the bond actually does.

Do you understand it? Will it still be around to pay your money back in ten years’ time?

However, the most important thing to work out is the company’s ability to pay you your interest on your bonds. To figure that out, you need to look at the amount of money the company is making.

Does the company have enough profits to pay its interest bill?

You can work this out by calculating a company’s interest cover. You take its operating profit figure and divide it by the total interest payable.

The higher the number you get, the safer your bond usually is.

Of course, working out whether a bond is a good investment or not involves making a few more calculations than this. But this will get you started.

So there you have it, what safety checks you need to carry out on corporate bonds.

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