1. Corporate bonds pay more than government bondsâ€¨
Depending on the corporate bond, investors can get a much higher yield than what they’d receive with governments. At the time of writing, for instance, a five-year Government of Canada bond is yielding about 1.4 per cent, while a five-year bond issued by the Bank of Montreal is paying about 2.6 per cent.
2. Corporate bonds come in many varieties
â€¨Most companies issue corporate debt, so you’ve got a lot of bonds to choose from. Of course, what you buy will depend on your risk tolerance. Corporate bonds pay more because they’re riskier -- they have a higher chance of default than a government bond.
You can stick to AAA or AA rated corporate bonds, which are generally the safest and pay the least, or buy something a little riskier with a lower credit rating, and get a higher yield. Ratings, which range from AAA to D, are assigned by rating agencies such as Standard & Poor’s and represent how creditworthy the agency thinks the company might be.
3. Corporate bonds have low default rates
â€¨While corporate bonds are riskier than government bonds, the default rate is still low. Rating agency Moody’s says there’s about a two per cent chance of corporate default these days -- much lower than the double-digit risk during the recession. That’s not to say you should throw caution to the wind, but if you stick to the right companies, you’ll likely have nothing to worry about.
4. Corporate bonds are fixed income
â€¨Every portfolio needs some fixed income. Bonds help reduce investment risk and they generally do well when the equity market falls. Again, corporates are riskier than government, especially if the market crashes, but they are also bonds.
If a company goes bankrupt, it typically has to pay bond holders back before shareholders, so you have a better chance of recouping your dough if something goes wrong. That said, a small mining company bond isn’t necessarily safer than BCE equity, but a BCE bond is, theoretically, a less risky buy than BCE stock.
The bottom line is that, these days, corporate bonds are relatively safe and they provide income that you can’t find in the government bond market.
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