Latest news with #corporatebonds
Forbes
27-05-2025
- Business
- Forbes
6 Of The Best Fixed Income Funds To Diversify Your Investments
Fixed-income investments are in the spotlight, thanks to strong yields and prevailing stock market uncertainty. A solid income stream paired with relative price stability is an appealing combo, and investors are taking advantage. If you'd like to increase your allocation to fixed income, here are six solid funds to consider. Fixed-income assets provide important diversification for well-rounded portfolios. The best fixed-income investments can deliver predictable income without wild price swings. Alongside growth-oriented equity holdings, fixed-income securities have a stabilizing effect. Learn more about diversifying investments. Funds provide easy access to that fixed-income exposure. They also deepen a portfolio's diversification because they hold multiple securities—often with varying maturities and issuers. The best fixed-income investments below were identified by screening mutual funds and ETFs for these criteria: Although the universe of funds screened included mutual funds, the top funds meeting these criteria were all ETFs. The table below introduces six fixed-income ETFs with intermediate-term maturities, reasonable expense ratios and strong track records relative to peers. They are listed from lowest to highest expense ratio. The SPDR Portfolio Intermediate Term Corporate Bond ETF tracks the Bloomberg Intermediate US Corporate Index. The holdings are fixed-rate debts, each with an outstanding par value of $300 million or more, issued by industrial, utility and financial businesses. SPIB holds nearly 5,000 debt securities, with the top holding comprising just 0.23% of the portfolio. Issuers include Goldman Sachs, Bank of America, Duke Energy and Amazon. All holdings are investment-grade quality, with an emphasis on A1 through A3 credit ratings. A1 through A3 are the fifth, sixth and seventh highest ratings on Moody's scale. They are considered upper-medium grade, which implies low credit risk but warrants a premium vs. the highest-rated AAA issues. This supports the fund's competitive yield of 4.95%. SPIB has the longest average maturity of the funds on this list, at 4.88 years. SPIB provides monthly distributions. Since early 2024, the payouts have ranged from $0.10 to $0.12 per share. VanEck IG Floating Rate ETF tracks the MVIS US Investment Grade Floating Rate Index. The index includes investment-grade, corporate-issued, floating-rate notes. FLTR provides exposure to floating-rate debt, which is appealing if you expect interest rates to rise. Because the rates reset periodically, the holdings should not lose value when interest rates increase—nor will they appreciate if rates fall. The securities in the FLTR portfolio are denominated in U.S. dollars, but the issuers are all over the world. The international exposure to the United Kingdom, Australia, Canada, Japan and others can extend your portfolio's diversification. On the other hand, FLTR has a heavy concentration in financials, which could be a disadvantage depending on how else you're invested. FLTR pays distributions monthly. Over the past 18 months, the payouts have ranged from $0.09 to nearly $0.14. iShares 3-7 Year Treasury Bond ETF invests in intermediate-term debts issued by the U.S. government. This portfolio is more conservative than funds holding corporate debt. Moody's recently downgraded the U.S. government's credit rating from the highest AAA rating to AA1, citing the growing debt balance and high interest payment ratios. Standard & Poor's and Fitch, the other two credit agencies, downgraded the U.S. government from AAA in 2011 and 2023, respectively. Even so, IEI provides a good yield and slightly higher credit quality than many corporate debt portfolios. The effective duration of nearly five years ensures some stability in interest income, though this portfolio would be subject to price changes driven by interest rates. IEI pays distributions monthly, in amounts that have recently ranged from $0.28 to $0.34 per share. Janus Henderson AAA CLO ETF invests in investment-grade collateralized loan obligations (CLO). CLOs are securitized bank loan portfolios, which include floating-rate loans made to companies with credit ratings below investment grade. The loans have collateral, which provides some security, and the portfolio is divided into groups, called tranches, of varying risk levels. The AAA tranche is the safest. AAA investors receive payments first and absorb losses last. JAAA provides exposure to higher-yield, floating-rate CLOs. This fund is a diversification play. CLOs do not have the downside risk of traditional fixed-income securities because their rates adjust to market conditions. But due to the complexity of these assets and the lower quality of the underlying loans, their yield can be high. The presence of collateral and the priority of the AAA tranche mitigates some of the risks. JAAA launched in 2020 and has since produced a three-year average annual NAV return of 5.9%. The fund makes monthly distributions that have recently ranged from $0.20 to $0.27, producing a 30-day yield of 5.48%. Eaton Vance Short Duration Income ETF invests in U.S. Treasury securities, corporate bonds, mortgage-backed securities and asset-backed securities with an average duration of three years or less. EVSD is an actively managed and diversified portfolio of fixed-income securities with short to intermediate maturities. The portfolio prioritizes securities in the lower end of the investment-grade range—ratings of A1 through A3 and Baa1 through Baa3 on Moody's scale. About 30% of the EVSD portfolio is asset-backed, mortgage-backed and commercial mortgage-backed securities. There is also a small position in higher-yield, speculative bonds. The inclusion of varying debt types and credit qualities helps the fund reach its stated goal of above-average returns over three to five years. EVSD pays monthly distributions that have fluctuated from $0.18 to $0.24 per share over the past 18 months. iShares CMBS ETF invests in U.S.-issued, investment-grade, commercial mortgage-backed bonds. The underlying mortgages typically finance office buildings, shopping centers, factories, hotels and apartment buildings. As with CLOs, the mortgages are grouped by their risk level to create multiple tranches with different risk levels and yields. Commercial mortgage-backed securities pay higher yields than Treasury or corporate bonds and have different risk profiles. They are tied to commercial real estate, since it is the underlying collateral for the loans. This ETF's portfolio is primarily AAA- and AA-rated securities, at the lower end of the risk spectrum. It provides a nice entry point for investors who want to raise their overall fixed-income yield by diversifying into commercial mortgage-backed securities. CMBS pays monthly distributions that have varied from $0.11 to $0.14 over the past 18 months. Bottom Line Fixed-income funds can deliver income, stability and diversification with varying degrees of risk. They can also provide exposure to more complex market segments that were once only available to institutional investors, such as CLOs and commercial mortgage-backed bonds. If you are new to fixed-income investing, opt for simpler funds that prioritize credit quality. You can always expand your exposure for higher yields later, as you gain investing confidence. Fixed-income funds are a great choice for novice investors. These funds can provide income and stability, which can provide a stabilizing effect on portfolios with heavy stock exposure. There are thousands of fixed-income mutual funds. Some specialize in a market segment, like tax-free municipal bonds or corporate bonds, while others have a diversified strategy. Fixed-income funds commonly pay monthly distributions.
Forbes
27-05-2025
- Business
- Forbes
This 1 Simple Trick Can Make CEF Management Fees Vanish
Wooden Blocks with the text: Fees getty Plenty of investors miss out on the huge yields (often north of 8%) that closed-end funds (CEFs) offer. There's one simple reason why: They get way too hung up on management fees. We're going to look at a few reasons why that is today—and one easy way you can make those fees disappear entirely. But first, just how high are the fees we're talking about? Well, the average fee for all CEFs tracked by my CEF Insider service is 2.95% of assets. In contrast, the largest ETF on the planet, the SPDR S&P 500 ETF Trust (SPY), has a fee of just 0.09%. So, to be sure, we are talking about a big gap here. But although CEFs' fees are much higher, there are many reasons why we shouldn't put too much weight on them when making buying decisions. Let's talk about those now. SPY holds every stock in the S&P 500—in other words, the 500 large-cap companies that represent the biggest public firms in America. And while these stocks do well in good times, they can have rough runs, like we saw in April, for example. That's why we want to make sure we're investing in assets beyond stocks, like corporate bonds. CEFs let us do that, and they give us access to smart human managers (not to mention high dividends), too. An actual person at the helm is vital in a lot of these asset classes, and in particular corporate bonds, because deep connections are key to getting access to the best new issues. We all know deep down that diversification works. But using CEFs to do it really can take things to another level, thanks in part to their high dividends. Look at the performance of the PGIM Global High Yield Fund (GHY), in purple below, since the start of 2025 to the time of this writing. GHY is a CEF Insider holding that yields an outsized 9.8%. GHY Total Returns Ycharts As you can see, GHY outran SPY (in orange) while diversifying its shareholders beyond stocks and the US, too. In addition, the bond CEF barely fell below breakeven in April, while stocks were down 15%. And bear in mind, as well, that these numbers are net of fees. Speaking of which, GHY's fees are far higher than those of SPY (1.5% of assets compared to 0.09%) All that said, some CEFs do focus on S&P 500 companies, and still have higher fees, which brings me to my second point… GHY, as mentioned, has total expenses of 1.5%, better than the CEF average but still quite high. Compare that to the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), an S&P 500–focused CEF whose fees are much less, at 0.97%. But wait, if SPXX is focused on US large caps, why are its fees around 10 times those of SPY? It's largely because SPXX also sells call options on its holdings—or rights for investors to buy them at a fixed date and price in the future. The fund gets paid for these rights (and uses those fees to help fund its 7.7% dividend). There's some cost and work attached to that strategy, hence the higher fees. But it's a small price to pay to get a dividend that's nearly six times that of SPY. Currently, all CEFs covered by CEF Insider have an average yield of 9.1%, while SPY, as mentioned, yields 1.3%. In other words, a million dollars spread across all CEFs would get you over $90,000 in annual income, or $7,572 a month, versus less than $13,000, or about $1,075 monthly, from SPY. Income Potential CEF Insider This is why many investors use CEFs to fund an early, or partial, retirement; if it takes $682,286 in savings to replace the average paycheck in America (as measured by the Bureau of Labor Statistics' median weekly earnings survey) with CEFs but a staggering $4.8 million saved with SPY, you can see why CEFs could attract more attention—and thus, CEF issuers can charge higher fees. Now, here's the kicker: CEFs have an unusual structure that means they often trade for less than their assets are actually worth. Let's say you have a CEF that has $100,000 spread across shares of NVIDIA (NVDA), Apple (AAPL) and (AMZN), among others, and the CEF has 10,000 shares in total. Each share is worth $10. Easy enough. But CEFs are, as the name says, closed. That means CEF issuers can't issue new shares to new investors, so all of the shares trade on the public market, like stocks, and their market prices fluctuate based on investor demand, sometimes diverging from the actual value of the underlying holdings. If that demand is higher than the actual market value of the CEF, it'll trade at a premium to its portfolio's net asset value, or NAV; if lower, it'll trade at a discount. On average, CEFs trade at a 6% discount, according to CEF Insider data. So if your CEF trades at a discount wider than its annual management fee, the discount can effectively offset the cost of that fee. And bear in mind that some CEFs are steeply discounted, with discounts of 10% or more. It's worth pointing out that the fees are taken out of the CEF's portfolio by managers automatically as a matter of course; investors don't have to mail off a check. Let's wrap with a quick recap, then: CEFs give you access to discounted, high-quality assets, far higher income than most ETFs, and they give you a high-income, low-cost way to diversify, too. Plus, the best CEFs outperform their benchmarks—including the S&P 500. This is why CEFs are a passive income weapon that many wealthy investors are happy to keep in their arsenal. Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report 'Indestructible Income: 5 Bargain Funds with Steady 8.6% Dividends.' Disclosure: none
Zawya
26-05-2025
- Business
- Zawya
Kenya's financial regulators seek to boost issuers' victim compensation
Kenya's financial sector regulators are discussing a proposal to require fund managers, investment banks and stockbrokers to make full disclosures of their clients whose funds are invested in corporate bonds. This is in an attempt to improve the value of compensation to victims of distressed bond issuers and save the corporate bond market from further crisis of confidence. The customer disclosures, the regulators say, will help to ensure bondholders of collapsed or defaulting issuers receive maximum compensation. Currently, fund managers pool together resources from several clients and make investments in corporate bonds as single investments and usually in their name, without disclosing the identities of the investors. This means that in the event an issuer falls into distress, the investment will be treated as a being from a single investor—the fund manager. Therefore, in the case of the Capital Markets Authority (CMA), the fund manager's compensation will be limited to a maximum of Ksh200,000 ($1,550.38), and this has to be shared among the many investors whose resources had been pooled to invest in the bond. Assuming the fund manager collected hundreds of millions from investors and bought a corporate bond, the investors would lose heavily. The financial regulators believe if the identities of the investors in the pooled investment are disclosed, each of them can be treated as an independent bondholder and thus minimise losses.'I think this has been a very good discussion largely and a lot of progress has been made. So, I need to confirm where we are, but I think these discussions have been very helpful. They have involved, of course, all the parties under the joint financial sector regulators and I think they made very good progress,' CMA Chief Executive Wycliffe Shamiah told The EastAfrican in an interview.'The issues of disclosures are the ones we are trying to see how we can make it easier for those who are making these investments, and it has sort of been agreed,' he added. He indicated that discussion among all financial sector regulators—CMA, Central bank of Kenya, Insurance Regulatory Authority, Retirement Benefits Authority and Sacco Societies Regulatory Authority—are centered on full disclosure of the investors whose money is invested by fund managers, investment banks and brokers in bond issues.'We have learnt from experience. For instance, if you find fund manager A has put Ksh100 million ($775,193.79) in a corporate bond. This fund manager is not using money from one person. There are many people who have given him money, so when the Ksh100 million goes bust there are many people who have burnt their fingers because the money was for many investors,' said Mr Shamiah.'So what we were discussing is how we can make it so that when people are being compensated you don't just look at the fund manager alone. You have a way of the fund manager sharing with the rest of the people who are the specific investors so that each of them can be seen as a separate investor,' he added. These discussions follow public outcry over the loss of investor funds in several companies that collapsed or defaulted on their debt repayments after issuing bonds. For instance, in 2015, Chase and Imperial banks were given the go-ahead to issue Ksh4.8 billion ($37.2 million) and Ksh2 billion ($15.5 million) bonds, respectively, only for the two lenders to be pushed into receivership in quick succession by the Central Bank as a result of financial and corporate governance issues. Other companies that have in the past defaulted on their obligations in the corporate debt market include Nakumatt (collapsed), ARM Cement (in liquidation), Real People Kenya Ltd and Consolidated Bank of Kenya, which was later bailed out by the National Treasury. Attempts by the CMA to amend the deposit protection law - separating fund managers' bond investments from customer deposits and other bank liabilities to protect bondholders in case of a bank collapse -have been unsuccessful. The absence of a compensation scheme for bondholders in collapsed companies has instilled fear of investing in corporate bonds. Treasury bonds remain dominant in the Kenyan bond market, accounting for about 99.93 per cent of the debt market. As of December 31, 2024, there were five active listed corporate bond issuers on the Nairobi Securities Exchange, with the total outstanding amount of bond issues at Ksh19.5 billion ($151.16 million). These are East African Breweries Ltd (Ksh11 billion or $85.27 million), Real People Kenya Ltd (Ksh390.93 million or $3.03 million), Family Bank Ltd (Ksh4 billion or $31 million), Kenya Mortgage Refinance Company (Ksh1.1 billion or $8.52 million) and Linzi Sukuk (Ksh3 billion or $23.25 million). © Copyright 2022 Nation Media Group. All Rights Reserved. Provided by SyndiGate Media Inc. (
Forbes
25-05-2025
- Business
- Forbes
Thank The Fed For This Cheap 14% Dividend
WASHINGTON, DC - DECEMBER 13: U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news ... More conference at the headquarters of the Federal Reserve on December 13, 2023 in Washington, DC. The Federal Reserve announced today that interest rates will remain unchanged. (Photo by) Let me start with a prediction: the S&P 500 will gain about 5% this year—not great, but not bad, either. This isn't really a Nostradamus-level call: I'm simply annualizing the gain the market has posted so far in 2025, as of this writing. We can think of this year as the middle stage of the business cycle—where inflation is cooling, the labor market is softening, and consumer spending is starting to slow (emphasis on starting to). In other words, it's the perfect setup for us to make sure we're well diversified by looking at assets beyond stocks. At the top of our list? Corporate bonds. Why are we looking at corporate bonds now? Two words: the Fed. The central bank has been expected to cut rates aggressively for a long time now, and while it did cut twice in 2024, the story was how those cuts were fewer than expected. That story has repeated itself this year, with the Fed continuing to hold back on rate cuts, even though investors have consistently expected more. To take advantage of the Fed's slow-walk on cuts, we're targeting closed-end funds (CEFs) that focus on corporate bonds. That's because the bonds these funds own were issued when yields were high, and a shift toward later rate cuts gives them more time to buy said bonds—and most important, keep maintaining high payouts to us. And the truth is, rates will move lower, either due to a shakeup of investor confidence resulting from the recent US government-debt downgrade or, more likely, the natural progression of the business cycle, under which the economy would continue to slow. Then, when rates do come down and investors go looking for higher income, the value of these funds' bonds—and indeed the value of these funds themselves—should rise. So to sum up, we've got a chance to buy in now, while yields are high, and front-run the income-seeking crowd set to pile in later. One fund is quietly positioning itself to capitalize on this setup right now—and paying a rare 14% income stream while flying under most investors' radar: the Nuveen Core Plus Impact Fund (NPCT), a holding of my CEF Insider service. Consider what this low-profile bond CEF offers us: The thing to keep in mind most about the fund's recent and future returns is that, due to its outsized yield, a huge slice of its gains come our way as dividends. So we're talking about liquid profits here: real, spendable income we can use however we like. The cause of that discount is worth considering, too. Note the name: This fund focuses on corporate bonds issued by companies that comply with environmental, social and governance (ESG) benchmarks. I think you'll agree that ESG has fallen out of favor with investors on both Wall Street and Main Street. That sounds like a negative, but it's actually an opportunity for us, since it's a big part of the reason for that 8.4% discount—many investors simply hear 'ESG' and pass this fund by without taking a look under the hood. NPCT Holdings That's causing them to walk right past a smartly run fund with a well-built portfolio. Bonds issued by regional-bank powerhouses with decades of stability, like PNC, and large international banks, like Standard Chartered, have been delivering reliable income that NPCT's managers have handed over to investors. Meanwhile, NPCT, and its shareholders, have quietly collected that huge income stream throughout this 'mid-cycle' period. Eventually, the fund will either change its ESG mandate or investors will simply ignore that mandate and take note of the fund's top-quality bond portfolio. That's especially likely if we see rate cuts accelerate. NPCT's discount, then, is entirely due to investors misunderstanding how reliable and enduring the fund's dividend is. And misunderstandings like that are perfect for us contrarians to exploit. Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report 'Indestructible Income: 5 Bargain Funds with Steady 8.6% Dividends.' Disclosure: none
Daily Mail
20-05-2025
- Business
- Daily Mail
Investing in retail and corporate bonds: How to tap firms direct or invest in funds
Corporate bonds are popular among investors, typically offering lower risk and higher income than shares. Another route to investing direct in companies has opened up in recent years from the retail bond market - although the more risky mini-bonds are now out of favour. Corporate bond funds invest in a number of different firms and help spread risk, but you will end up paying fund manager fees. We explain why investors like corporate bonds and how to invest. What is a corporate bond? Corporate bonds are used as a way of raising money for businesses - it's essentially a certificate of debt issued by major companies. When you buy bonds you are lending money to a company in exchange for an IOU. The IOU has a term and at maturity (typically five or ten years) the sum invested is returned in full. The only thing that might stop this is if the company actually goes bust. The bond also has a coupon - the amount of interest paid, say 5 per cent. As long as you hold that bond you are paid that coupon every year and if you keep it to maturity you will get your capital back. Crucially, the coupon is a fixed percentage of the cover price of the bond. So if you buy a £10,000 ten-year bond with a 5 per cent return, you will receive £500 each year in interest, and after ten years you will get your £10,000 back. So far this is not so different from a fixed-rate savings account or savings bond, except your bond is an investment and not a savings product, so it is not covered by the Financial Services Compensation Scheme's £85,000 individual savings protection cover. Crucially, this means that your bond is only as safe as the company issuing it - something reflected in smaller, more risky firms having to offer higher rates to tempt investors. Can you sell a corporate bond early? The key difference in flexibility between a corporate bond and fixed rate savings is that during its lifetime a market-traded corporate bond can be bought and sold and its price will change according to the market. So if you hold a ten-year corporate bond you personally don't have to wait ten years to cash in the bond - you could sell it at any point. But if you do want to sell it on, between its issue and maturity date the bond's price will rise and fall and at any given moment it may be worth less than you paid for it. Perhaps you would only get £95 for every £100 you invested. On the other hand it may be worth more and you will be able to make a capital gain on the investment as well. When bonds are trading above or below their initial level they are said to be trading above or below par. If you buy a corporate bond second-hand, you will get the right to be repaid its value at maturity and its coupon interest rate until then, but paying above or below par for the bond itself will change the income return. This means that with traded second-hand bonds a yield to maturity is also typically quoted. If you buy at a discount your yield to maturity will be higher than the original coupon rate, and if you buy above par it will be lower. Direct investing vs bond funds Typically individual investors have bought corporate bonds through funds. These invest in a number of different firms and help spread risk accordingly. You will end up paying fund manager fees though. A bond fund manager aims to take advantage of swings in the markets and deliver a return based both on the income from the bonds held in the fund and the extra boost from buying traded bonds below par, or selling them above par. The problem with a corporate bond fund is that its value depends on its varied holdings and dealings and can be affected by the market's view on what will happen to interest rates. Buy in as interest rates are rising and the value of the bonds it holds may fall and so will your holding in the fund. Likewise, if the manager makes a bad call on buying bonds in companies that fold, or if his view that a certain company's below par bonds will bounce back is wrong, the fund can lose money. A manager's ability to trade bonds can give a fund a turbo-charge along with its income return. But if you bought into a bond fund now and sold out in five years' time you could also find that you do not get back the capital that you put in if it has not done well. If you bought an individual bond you would get back your capital in full, as long as the issuing firm didn't go bust. On the flipside, a good bond fund could rise in value thanks to some nifty trading and deliver a solid income return and capital growth. Holding a bond fund also spreads risk among many different companies. By comparison if you just buy a corporate bond from one individual firm you are putting all your eggs in one basket and not spreading risk, but you will also know that if you hold it to maturity (and the firm doesn't go bust) you will get your money back. The Financial Conduct Authority is looking at plans to remove barriers and give individuals direct access to investing in the debt of larger companies. How do retail bonds work? The London Stock Exchange launched a retail bond market on February 2010 called the Order Book for Retail bonds, known as Orb. The aim was to encourage more firms to go direct to personal investors with bonds as the minimum investment is lower. These have been dubbed retail corporate bonds, or just retail bonds, and are bought and sold through brokers and investment platforms. Popular issues over the years have included Tesco Bank, National Grid and Severn Trent Water bonds. The minimum investment for this type of bond starts at a low level - sometimes as little as £100 but more usually from £1,000 - and companies use the money raised to grow or to fund their activities, or reduce their reliance on bank borrowing. These retail bonds are specifically targeted at small investors and are separate from the far larger corporate bond market dominated by institutions. You can make money on them early if they are trading higher than the initial offer price - but you might lose money if you sell when they are trading lower. How do mini-bonds work? Mini-bonds are unlisted products, meaning they cannot be traded and are not to be confused with retail bonds, corporate bonds and gilts - UK government bonds - which can be bought and sold on the London Stock Exchange. They are out of favour and issuance has dried up following a string of scandals. Mini-bonds cannot be traded on the Orb market, so investors cannot get out early, and are not subject to the same scrutiny that Orb demands. They became controversial following the high profile £236million collapse of London Capital & Finance, which swept away the savings of many investors in January 2019, and the failures of a series of others. Mini-bonds are simply corporate bonds for private investors, so your cash is being lent directly to businesses. If all goes well, at the end of the term, your money is given back to you in full - and you keep the interest you've banked. But if the company goes bust, you run the risk of losing everything. A wide range of companies and organisations launched mini-bonds - sports clubs, solar panel firms, property specialists, a charity, a restaurant chain, a hotelier and a chocolate retailer among them. What are the risks of retail and mini-bonds? Both mini-bonds and retail bonds are far riskier than high street savings accounts. They have always come with serious risk warnings, including from This is Money whenever we write about them. We make the following points when we report on a new mini or retail bond launch. * Unlike with a savings account, you are not protected by the UK's Financial Services Compensation Scheme, which guards against losses of up £85,000. * They are an investment only for those willing to take a risk and do some homework on a firm's financial strength. * They often come with perks, which depending on the issuer have ranged from sports tickets to chocolate, but you should resist being distracted by trinkets and focus on the investment case. * The varying interest rates on retail bonds and mini-bonds reflect the amount of risk attached - generally, the higher the return, the higher the risk. * You should beware of putting too much of your money into one or just a handful of bonds. * It's worth considering a corporate bond fund, which will lend to large firms and spread your risk. * Bonds held in an Isa can deliver tax-free income, but investors should investigate the potential tax liabilities on individual investments. We also offer a checklist for buyers to follow on how to research the health of companies and assess the prospects of individual bonds, which is below. What to check before buying retail bonds and mini-bonds * Any investor buying individual shares or bonds would be wise to learn the basics of reading a balance sheet. * When looking at bonds, research all recent reports and accounts from the issuer thoroughly. You can find official stock market announcements including company results here. * Check the cash flow is healthy and consistent. Also look at the interest cover - the ratio which shows how easily a firm will be able to meet interest repayments on its debt. This is calculated by dividing earnings before interest and taxes (known as EBIT) by what it spends on paying interest. Read our guide to doing investment sums like this here. * It is very important to find out what the bond debt is secured against, and where you would stand in the queue of creditors if the issuer went bust. This should be included in the details of the bond offer but contact the issuer direct if it is unclear. * Consider whether to spread your risk by buying a bond fund, rather than tying up your money with just one company or organisation. * Inexperienced investors who are unsure about how retail or mini-bonds bonds work or their potential tax liabilities should seek independent financial advice. * If the interest rate is what attracts you to the bond, weigh up whether it is truly worth the risk involved. Generally speaking, the higher the rate on offer, the higher the risk. * If the issuer is a listed company, before you decide whether to buy it is worth checking the dividend yield on the shares to see how it compares with the return on the bond. Share prices, charts and dividend yields can be found here. * Investors should bear in mind that it can be harder to judge the risk involved in investing in some bonds than in others - it is easier to assess the likelihood of Tesco going bust than smaller and more specialist businesses. How are interest rate returns decided? The return a company has to offer on corporate bonds depends on a number of factors - current interest rates, whether they are expected to rise, and crucially how stable that company is seen as. Some smaller companies may offer corporate bonds paying much larger returns, sometimes nicknamed 'junk bonds'. This return has to be higher due to the heightened risk of going bust - so investors should be cautious as to which companies they feel are stable enough to pay out. If in doubt get financial advice Corporate bonds might sound safe but they are an investment not a savings product. If you are an inexperienced investor or do not understand the market, then seek independent financial advice.
