Corporate bonds may not be worth the investment, especially when compared to Treasury bonds. Here’s what you need to worry about when investing in corporate bonds:
The solidity of the company issuing the bond: If the company goes down, you may lose some or all of your money. Even if the company doesn’t go down but merely limps, you can lose some or all of your money.
Callability: There’s a chance that the issuing company may call in your bond and spit your money back in your face at some terribly inopportune moment (such as when prevailing interest rates have just taken a tumble).
Liquidity: Will someone be there to offer you a fair price if and when you need to sell? Will selling the bond require paying some broker a big, fat mark-up?
Economic upheaval: In tough economic times, when many companies are closing their doors (and the stocks in your portfolio are plummeting), your bonds may decide to join in the unhappy nosedive, en masse. There go your hopes for an easy, sleep-in-late retirement.
So why even mess with corporate bonds?
Ah . . . that is a question that some of the world’s most prominent investment experts have also asked, and they don’t all come up with the same answer. Some argue that corporate bonds are indeed worth all the hassle and doubt because the higher rates of interest they pay make them preferable to Treasuries. Others argue that the difference in interest rates between corporate bonds and Treasuries (known as the spread) isn’t worth the potential trouble of holding corporates.