Corporate Bond Analysis: What to Consider
Many investors have become more focused on the fixed-income market in the past several years.
While bonds have been around for centuries, the most recent surge in activity has come from investors who are searching for the age-old combination of safety and income. Many individual investors have some experience with equity markets, but those returns have not been stellar over the last decade. At the same time, very high–quality fixed-income markets like U.S. Treasuries are near all-time lows in yields.
As a result, many folks are beginning to look at “credit.” Credit can be broadly defined as any bond that has a risk of lack of payment, but we’ll restrict ourselves in this discussion to one of the largest credit markets, corporate bonds. Because these bonds reference companies, investors who have experience with evaluating stocks should find many of the terms and tools used in the analysis of corporate bonds easy to grasp, though there are very important differences that we’ll discuss below.
The obvious, but important, question investors are trying to answer when looking at corporate credit is the extent to which a company will be both willing and able to pay coupon and principal. Clearly the risk of default is a