Corporate Bond Analysis: What to Consider

by Jason Brady

Corporate Bond Analysis: What To Consider Splash image

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.

...To continue reading this article you must be registered with AAII.

Gain exclusive access to this article and all of the member benefits and investment education AAII offers.
JOIN TODAY for just $29.
Log in
Already registered with AAII? Login to read the rest of this article.

Register for FREE
to read this article and receive access to future articles.
Jason Brady is a portfolio manager and managing director with Thornburg Investment Management. He is author of “Income Investing: An Intelligent Approach to Profiting from Bonds, Stocks, and Money Markets” (McGraw Hill, 2012).


Kenichi from California posted over 2 years ago:

I learned a lot about Bond issues. Thnak you very much.
Ken Suzuki

George from Virginia posted over 2 years ago:

Finally a rare and easy to understand article about applying Bond Analysis techniques to evaluate investment risks. Well Done!!!!!

William from Pennsylvania posted over 2 years ago:

The Bond Metric article would have been much more helpful to a mutual fund investor if the author had given:

1. Numeric comparison tables.
2. Numeric values of good ratios and poor ratios.
3. references where such values / tables could be obtained.

Martin from New Jersey posted over 2 years ago:

And then there was General Motors!!!

John from Florida posted over 2 years ago:

Certainly a lot to understand and consider.

I have for the past several years used Closed End Funds (Bonds) mostly from Pimco and Blackrock. In addition, I note what other institutions own the same fund. I use their collective analysis to make my selections.

Phil from Illinois posted over 2 years ago:

The cautions in this article point out why many investors are better off buying one or more bond funds, rather than individual bonds. A bond mutual fund typically owns a large number of carefully-researched bonds. Any default will be mitigated by the large number of holdings and experienced fund managers can (and do) adjust duration and cash to fit the current economic conditions.

Paul from Maryland posted over 2 years ago:

I agree with Philip that most individual investors should stick with bond funds. In today's environment of very low interest rates I stick with funds that invest in short term bonds.

Another way to try to provide regular income is to invest in blue chips that pay regular dividends.

John from California posted over 2 years ago:

I'm with Paul and Phillip. Short term bond funds with low expenses.

Saroj from Ohio posted over 2 years ago:

One of the best Corporate bond analysis information guide I have read in a long. Very Pleased.Thanks.

Charlie from Florida posted over 2 years ago:

My wife and I are simple people. We file a short form which I prepare using TurboTax. We are nearing retirement (I'm either retired or unemployed at the moment - I'm not sure which). This past month we took a large portion of our cash and bought a 10 year bond ladder made up of 98% investment grade and 2% high yield (bb). We picked up 20 different issuers.

To build a simple example - let's say for each issuer we have 25 bonds and the entire ladder yields 25K per year. Let's make the year 2013 and a bond with a maturity date of 2016 defaults. Assume the bond was picked up at a premium - $110.

If we get nothing back after the default - what could we recoup on our 2013 tax return ? Nothing ? The principal at par ? The principal at premium ? How about lost interest payments ?

While I've got your attention - what happens in the case where a bond is called away at par ? Is there any way to recoup the premium cost on a tax return ?


Jerry from Arizona posted over 2 years ago:

Good article!

Hildy from Pennsylvania posted over 2 years ago:

Very inciteful article.It makes the case for buying high quality individual bonds, not for buying bond funds. It is not better if the contents of the box are wrapped so you cannot know what is inside.

William from Connecticut posted over 2 years ago:

We are now at record low interest rates. Under these conditions, if one purchases shares of anything but the shortest term mutual bond funds, and interest rates return to more "normal" levels, aren't the odds of recouping one's initial investment significantly reduced?

Roland Montambeau from Nevada posted 11 months ago:

Outstanding article. Not only sound but literate and has a human touch.

You need to log in as a registered AAII user before commenting.
Create an account

Log In