Investing in corporate bonds represents a new frontier for some baby boomers who are anxious to implement a retirement recovery plan. Yields to maturity in the 7%-10% range are now available, making some of these bonds quite attractive. Despite the dramatic failures of major corporate bond issuers in recent months, it appears that there are opportunities out there. Finding those opportunities is the key because threats of corporate insolvency are everywhere. Using the correct bond investing strategy for baby boomers is also important.
Corporate Bond Investing Risks
The risk of insolvency with corporate bonds cannot be eliminated, only controlled. Fortunately, there are bond rating and grading companies that can help us evaluate this risk. The most well known bond rating agencies are Standard & Poor’s, Moody’s and Fitch. Each has its own ratings system. I prefer Standard & Poor’s because of its familiar letter rating system, which makes it easy to separate the C-grade junk bonds (high yield but risky) from the safer A, AA, and AAA investment grade bonds.
Interest rate risk arises from the fundamental concept that the resale value of a corporate bond goes down when interest rates go up. My strategy is to eliminate this risk altogether by purchasing bonds that I can hold to maturity. In other words, I don’t care what interest rates do because I am not going to sell the bond, only redeem it.
Focusing on Yield to Maturity
If you are planning to hold a corporate bond to maturity which is my intention, the important investing metric you want to evaluate is the “yield to maturity.” This is a complicated calculation that takes into account the price you pay for the bond, the “coupon” or interest rate that is paid by the bond issuer until the bond is redeemed for its par (face) value, and the maturity date. I have found that the easiest way to determine the yield to maturity for a particular bond is by using the Morningstar Bond Calculator. Using yield-to-maturity is also a fair way to compare the investment value of one bond to another.
How to Buy Corporate Bonds
Corporate bonds are typically sold in $1000 denominations. They are sold on the primary market (direct from the issuer) and on the secondary market. The average investor will not be able to purchase a bond in the primary market. Most full service brokers and some commercial banks sell corporate bonds on the secondary market. When you purchase on the secondary market, you need to clearly understand how the seller is being compensated. There could be a straight commission and/or the seller could add its fee to the price of the bond.
Obviously, one of the first things to do in this process is to find a bond that meets your criteria for ratings, coupon, maturity, and yield to maturity. The Financial Industry Regulatory Authority (FINRA) has a great bond information site that includes its TRACE database for obtaining data on corporate bonds that trade on the secondary market. I recommend that you use the FINRA site to do your searching for the right bonds, making sure you double-check the bond rating and also running the data through the yield-to-maturity calculator.
If you find a bond that interests you, write down the CUSIP (Committee on Uniform Security Identification Procedures) number for the bond and ask your broker or banker about the cost to purchase the bond from them. Only then are you prepared to make an informed decision.
Values in Investment Grade Bonds
You will have to do your own research (or ask your broker) for the best bonds for you. To give you an idea of what is available now, the Everyday Finance blog highlighted three corporate bonds that are not in the financial sectors that have yields to maturity over 10%! These are issued by Dow Chemical, International Paper, and Alcoa, all of which are solid companies. There are no doubt others that offer similar values.
What are your thoughts on corporate bonds for retirement investing?
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