Considering Corporate Bonds over a Bank CD? Read This.

April 26, 2013 No Comments »
Considering Corporate Bonds over a Bank CD? Read This.

If you went into a coma starting in March of 2009 and just woke up today and took a peek at both the Nasdaq and the Dow, you’d think we had fully recovered from our recession in just a few years time.

Back in March of ’09 the Dow was sitting in the low 6,000′s and the overall outlook of the US economy was fairly horrendous. As of this month though, the Dow has actually reached all-time high’s of comfortably over 14,000.  That’s above the mark it fell from before the 2008 bank collapse and well over 100% returns if you happened to invest in the Dow Jones index alone during those years.

If you’re a more conservative income-investor who mainly rely’s on bank deposits (like most readers here on BankVibe), then this may have you toying with the idea of investing in corporate bonds over today’s CD rates.

While many investors are taking advantage of corporate bonds, there are just as many (or more) who have no idea what this investment vehicle offers and why these should be considered.

Once you learn about the benefits of corporate bonds, you may find yourself leaving bank CD’s in the past, at least for now, and putting your money here.

Here are just a few of the many reasons why you should at least consider investing in corporate bonds:

1. Higher yields. Let’s face it: right now, the main reason to run away from bank CD’s is the low yield. Nobody wants to tie up their money in an investment that has no chance of earning a reasonable return.

With corporate bonds, higher yields are common, however, dont expect anything fantastic while interest rates in general are still low. You’ll almost always be able to beat CD rates with corporate bonds (even with the safest AAA bonds) but manage your expectations. While the rate is higher – as of today almost a half a percentage point higher – the risk is still greater than an FDIC insured bank deposit.

2. Diversity. As you learn more about corporate bonds, you will find that diversifying your investments is much easier. You have the opportunity to invest in a variety of sectors, meeting your every investment objective.

3. Safer than people give them credit for. Yes, there is risk involved with this type of investment but from a safety standpoint you are in pretty good hands. Corporate bonds are assigned a rating based on the ability to repay as well as credit history. A higher rating means a safer investment in terms of the likelihood that the money, including interest, will be repaid.

Note: don’t confuse safety with risk. Just because you have invested in a “so-called safe” corporate bond it doesn’t mean you are guaranteed a return.

[Related: Compare bank CDs with US treasury bonds.]

The main reason why many people shy away from corporate bonds is a lack of knowledge. Rather than learn more and potentially invest, they opt for something less complicated and more mainstream, such as a bank CD.

Don’t let your lack of corporate bond knowledge hold you back. This is a great alternative to bank CD’s for many reasons, including those above. If nothing else, take the time to compare the pros and cons of all your options before making a final decision.

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