Question

You’ve read about bonds, and should understand that they are basically agreements where you loan your money to a company (or other entity) who pays interest while it uses your money, then repays the principal.

If you were going to lend money to a company, which one would you choose and why? Remember, the bigger and safer the company, the lower the return; but if a company is too risky, you might lose everything. That said, what company out there do you think would be a good candidate to borrow money from you?

Answer 1

If we have to invest in corporate bonds, we will look into the credit ratings of these securities, Anything equal to AAA should be a good investment.

To explain further, we should look into the following factors before lending to a company:

• Earnings growth
• Profit margins
• Future outlook
• Regulatory environment
• Tax burden
• Industry trends

One company that we can invest in is Microsoft. It has good financials and its corporate credit ratings have been AAA, therefore, it has a low risk of default and will be providing higher yields than government bonds.