Bonds
Five things to check before buying a corporate bond
Look beyond the interest rate: issuer, rating, security, maturity and your total exposure.
1. Read the reason behind the rating
In one of my LinkedIn posts, I compared two bonds with different interest rates, ratings and outlooks. It is tempting to pick a winner immediately. But those details alone do not establish which is suitable for you.
The rating report is more useful than the letters on a product card. Read what supports the rating, what concerns the agency and what could lead to a change. An outlook adds context; it does not cancel out the underlying level of credit risk.
2. Understand how the company earns
You are lending money to a business. Try to explain that business in a few sentences. Where does its cash come from? What obligations must it meet? Is it borrowing more to service existing borrowing?
If the explanation depends entirely on the interest rate being attractive, you have not yet answered the repayment question. Company financials and the rating rationale help you have a more informed conversation.
3. Check what “secured” actually means
A secured bond has specified security behind it. Ask what that security is, how it is valued, what other claims exist and what the documents say about enforcement.
Security is not an assurance of full or immediate recovery. The asset may be difficult to realise, its value can change and recovery can take time. The word “secured” should open a set of questions rather than end them.
4. Match the maturity to your plan
An investment can look sensible in isolation and still be wrong for money you need soon. Review the maturity date, payment frequency, any early redemption provisions and the practical ability to sell.
Do not treat stock-exchange listing as proof of easy liquidity. Check whether there is actual trading and consider what you would do if you could not exit when you wanted.
5. Look at your total exposure
A manageable amount in one bond can become a large exposure if you hold other products linked to the same company, group or sector. Look through the product names to the businesses underneath.
There is no universal best bond. There is a decision about the borrower, structure, time horizon and amount that fits your circumstances. That is a much better discussion than simply asking for the highest rate available.