2nd Post - Corporate Bonds

Corporate Bonds

This is probably one of the best investments going right now. I have put a majority of my money in corporate bonds. Why do I like them? With the market going down, a lot of corporate bonds of good companies are selling from $500-$800. The coupons on these are >5% and the yield to maturity is from 10-15%. Sometimes you can find the YTM >15%. This is better than any CD you will find. Bonds are better than stocks in that if a company goes bankrupt, there is still a chance that you can still get your money back. Here is the rating of bonds.

Bonds can be bought through any brokerage account (Etrade, TDAmeritrade, etc.)

There is a reason that they are selling cheap in that the company might go bankrupt. I tend to stay away from bank, auto, and housing companies. These are where the greatest gains or losses occur. People who bought Bear Stearns were lucky when JP Morgan Chase bought them. The bonds were selling at or below $500. When it was purchased, Bear Stearns received the credit rating of JP Morgan and are now selling at $800 or higher. People who owned Lehman Brothers were unlucky and were practically wiped out when they went bankrupt. Here are things I look at before buying a bond.

1. Buy a bond below $1000. I like to buy bonds in the $700 range. The bond will go to $1000 when it matures.

2. I try to buy energy companies. They usually are more stable and have real assets so they have a greater chance of getting bought instead of filing for bankruptcy. Telephone and food companies are good also. They are recession proof.

3. Have a market cap of $1 Billion or more. If this is true, the company is probably big enough and will not file bankruptcy before the bond expires.

4. Have a maturity date in the next 10 years or less. I don't like to make long term commitments in companies I am not 100% familiar with.

5. YTM > 7%. You can usually find CDs for 4% so I want more return for the risk I am taking.

6. Buy an investment grade bond, usually BBB or better.

Other things to note: Minimum quantity to buy. Usually most bonds are 5. It is possible to lose all your money since they are not insured.

I have noticed lately that with the market going back up, the bond prices have also gone up, so you may not see the >15% YTM anymore. That is the problem with any investment idea, once everyone knows about it, the profit is squeezed.

Here is an example of a bond that is currently available that I like (not a recommendation).

CUSIP:86722TAA0
Suncor Energy is a $18B energy company. Its bond has a coupon of 6.1 and YTM of 7.6%. It is rated A-. The price is $90.

I hope this helps explain why I like corporate bonds right now. If you have questions/comments please add them to the comments and I will address them.