Check Bonds’ Credit Worthiness

Radio Transcript, 2 minutes 30 seconds, for use during week of Oct. 29.

Description: Penny and Ira discuss different types of bonds and making wise investment decisions when choosing bonds to invest in.

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.’