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What are the different factors and terms one should be acquainted with before investing in individual bonds? I'm currently looking at:

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It's all rather foreign to me though. When I look at this page it looks fairly simple:

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But when I selected the 3 year Corporate Investment Grade as a potential tool for myself. Once I click in is where I find the first screenshot which makes it look far more complicated. I don't really know what Yield to Worst or Yield to Maturity means, and didn't understand the definitions I found. I also read a bit about what it means to be a Callable Bond, but not seeing where on this table that's showing. Hoping someone here might be able to explain it better.

  1. What should I be considering and looking at in determining the right Bond selection?
  2. If 1.926% is available, that's better than most CDs, so what is the risk?
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  • Curious, why are you looking at individual bonds instead of ETFs or mutual funds which hold a series of bonds? Are you honestly able to risk the individual bond defaulting?
    – ChrisInEdmonton
    Jul 13, 2014 at 21:21
  • @ChrisInEdmonton well for one I don't know all of the risks, hence the question. But I don't invest any money that I can't afford to lose either.
    – Ender
    Jul 13, 2014 at 21:23
  • I don't really have the specific knowledge about bonds to answer your question, but I'll point you at this article on individual bonds vs bond funds. Although targeted at Canadians, it should apply in other countries, too. canadiancouchpotato.com/2010/03/29/bonds-v-bond-funds
    – ChrisInEdmonton
    Jul 13, 2014 at 21:25

1 Answer 1

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A few points that I would note:

  1. Call options - Could the bond be called away by the issuer? This is something to note as some bonds may end up not being as good as one thought because of this option that gets used.

  2. Tax considerations - Are you going for corporate, Treasury, or municipals? Different ones may have different tax consequences to note if you aren't holding the bond in a tax-advantaged account,e.g. Roth IRA, IRA or 401k.

  3. Convertible or not? - Some bonds are known as "convertibles" since the bond comes with an option on the stock that can be worth considering for some kinds of bonds.

  4. Inflation protection - Some bonds like TIPS or series I savings bonds can have inflation protection built into them that can also be worth understanding. In the case of TIPS, there are principal adjustments while the savings bond will have a change in its interest rate.

  5. Default risk - Some of the higher yield bonds may have an issuer go under which is another way one may end up with equity in a company rather than getting their money back. On the other side, for some municipals one could have the risk of the bond not quite being as good as one thought like some Detroit bonds that may end up in a different result given their bankruptcy but there are also revenue bonds that may not meet their target for another situation that may arise. Some bonds may be insured though this requires a bit more research to know the credit rating of the insurer.

As for the latter question, what if interest rates rise and your bond's value drops considerably? Do you hold it until maturity or do you try to sell it and get something that has a higher yield based on face value?

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