Check Bonds’ Credit
Transcript, 2 minutes 30 seconds, for use during week of Oct.
Description: Penny and Ira discuss different types of bonds
and making wise investment decisions when choosing bonds to
Announcer: Invest Wisely comes to you from Iowa State University
Extension through a grant from the Investor Protection Trust,
providing investor education on the web at: investorprotection.org.
Ira: Penny, last time we talked a little bit about what bonds
are and why they can be a good investment choice. I know
that there are both government bonds and corporate bonds. Are
there different risks involved in these different bond categories?
Penny: Yes. Federal government bonds are deemed to be
without risk and those rates set the floor on rates for all other
bonds, both state government and corporate. Corporate bonds
pay higher interest rates than government securities because
there is a higher risk. Mortgage bonds, backed by specific
assets, are the least risky corporate bond; debentures, backed
only by the company’s future earnings and promise to repay
are the highest risk.
Susan: Are there ways to minimize the risk with bonds?
Penny: There are several things you can do. Don’t
buy long-term bonds when interest rates are low. Stick
to short- and intermediate-term bonds. Purchase bonds with
different maturity dates. Diversify across different bond
issuers. Check the credit worthiness of the bond issuer.
Ira: How can I find some of this information? Like
the credit worthiness of a bond issuer?
Penny: The capacity of bond issuers to repay their debt is rated
by firms such as Moody’s and Standard and Poor’s. Bonds
rated Baa to Aaa by Moody’s and BBB to AAA by Standard
and Poor’s are considered investment grade bonds.
Susan: I’m interested in investing in bonds, but I don’t
have a lot of resources and I don’t really know much about
this investment area. How can I make the best use of the
resources I do have?
Penny: You might consider bond mutual funds.
Susan: That sounds interesting. What should I look for
when looking at bond mutual funds?
Penny: Look at the fund’s performance and charges. Studies
show that funds with lower management fees have outperformed
other funds. Also, an advantage of bond mutual funds is
that they may pay interest monthly or quarterly rather than every
six months like individual bonds.
Ira: That sounds like something that might be useful for me.
Penny: Yes. You should definitely consider bonds as part
of your overall investment strategy. And remember, for
more information, visit the ISU Extension website at extension.iastate.edu
and look for ‘Invest Wisely.’