Corporate Bond Investing Tips and Information

What Are Some Corporate Bond Basics?

Corporate bonds are issued by companies and create a number of obligations the issuing companies must fulfill that are more stringent than when companies issue stock.  With corporate bonds, issuing companies pay bondholders interest semi-annually.  For example, suppose you owned a bond that paid a 5% coupon and you owned 10 bonds.  For each bond you owned, you would receive $50 of interest each year and that interest income would be split into two semi-annual payments of $25 each.  

Below is a very basic introduction to individual corporate bonds.  Please watch this video, which is a soup-to-nuts explanation of how corporate bonds work.

What is the face value of a bond?
The face value of a bond is $1,000.  This is also known as the par value of a bond.  At a bond's maturity date, the issuing company is obligated to repay the bondholder the face value of the bond.       

How are corporate bonds quoted?
Individual corporate bonds are quoted as a percentage of their face value.  Therefore, if a bond is quoted at 95.00, that bond is being valued at 95% of the $1,000 face value, or $950.  Bonds that are quoted at less than their par value are said to be trading at a discount.  Bonds trading above par value are said to be trading at a premium.

How much will I pay when I buy a bond?
Suppose you execute a trade today where you buy 10 bonds at a price of 90.  Here's how the math works: First, each bond you bought cost $900.  Since you bought 10 bonds, you will pay $9,000 in principal.  In addition, you owe accrued interest since you will receive the full interest payment the next time the company pays interest.  Bonds pay interest semi-annually on either the first or the fifteenth day of a month.  For example, a bond may pay interest on a) February 15 and August 15 or b) on March 1 and September 1.  Suppose you bought the 10 bonds on July 15 and it last paid interest on February 15.  Let's assume the coupon of the bond is 5%, so the 10 bonds would pay the investor $500 of interest annually.  In this example, interest will have accrued for five months plus two days, as interest accrues until the day immediately before the trade settles, which is two business days following the trade date.  Interest typically accrues based on a 360-day year with 12 30-day months.  Five months and two days of accrued interest is equal to: ((30 days*5 months)+2 days) / 360 = 42.2% of total annual interest or $211.11.  On August 15, the investor who just bought the 10 bonds will receive $250 of interest, which is why she needed to pay the $211.11 in accrued interest to the selling bondholder.       

What are covenants?
Bond covenants are effectively the do's and don'ts bond issuers must follow to stay in compliance with the bond indenture, a contract between issuer and bondholder.  They govern the behavior of a company to help ensure bondholders are paid interest and receive a return of principal at maturity.  An example of one financial covenant is the "Leverage Ratio," which limits the amount of debt a company can issue relative to its EBITDA, or earnings before interest, taxes, depreciation and amortization.  Some investors believe covenants add 'complexity' to bonds, but, once investors understand them, they will see how they are in place for the benefit of bondholders.  Be sure not to look for similar covenants in a stockholders' agreement, as you will never seem them in there.

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What Is the Bond Ratings Scale?

Bond ratings scales represent the opinion of credit rating agencies as to the likelihood of a bond issuer defaulting.  As shown in the following bond ratings scale table, bond ratings begin at the top, with the Aaa / AAA rating, the highest rating a bond issuer can achieve.  In fact, it's so high that only two corporate bond issuers have the coveted Aaa / AAA rating: Johnson & Johnson and Microsoft.  For bond investing newbies, these bonds are called "triple A."  

As you move down the bond ratings scale, Moody's and S&P believe bonds have a potentially higher default risk.  Before we dive deeper into the bond ratings scale, it's important for investors to understand that the bond ratings scale only tells a very small part of the bond investing picture. 

Bond ratings only tell investors part of the story
Bond ratings only provide the opinion of the leading credit rating agencies as to the likelihood of a bond defaulting.  This is known as "credit risk" or "default risk."  What bond ratings do not tell investors is whether an individual corporate bond is a potentially good investment.  Bond ratings don't contemplate the price at which a bond is trading or its yield.  Bond ratings don't speak to the relative value of a corporate bond investment since they do not factor in the corporate bond prices of an issuer's bonds, how they stack up to comparable bonds, and how investors should compare the risk / reward opportunity of different corporate bonds.  In addition, bond ratings don't contemplate the interest-rate risk of a bond, or how sensitive the corporate bond's price will be to changes in underlying Treasury yields. 

Luckily, BondSavvy factors in all of these investment considerations when we make bond investment recommendations to our subscribers.

Apart from the bond rating weaknesses mentioned above, there are two others.  First, many bond ratings can go years with never changing, so investors waiting for a bond rating agency to upgrade or downgrade a bond and to use that as a 'signal' as to when to make an investment could be waiting a long time.  Second, bond ratings methodologies are flawed, as they reward big companies with 'well-diversified' product lines.  Large companies often have inflated bond ratings whereas the bond ratings of smaller companies are often underrated.  We discuss this issue in greater detail in a blog post called "Why We Are Pouring Ketchup on Bond Ratings."

The Bond Ratings Scale
As we move down the bond ratings scale, we eventually get to bonds that are rated BBB, or "triple B."  Hardly a day goes by where a pundit or some bond investing luminary talks about the BBB bond bubble, saying the leverage of these companies has reached unsustainable levels.  The truth of the matter is that most companies rated BBB have leverage ratios (total debt divided by the company's EBITDA for the last twelve months) of 3.0x and less.  If such companies have a responsible capital allocation policy that avoids spending billions on share repurchases, focuses investment on growing the company, and leaves some cash in the kitty for a rainy day, these companies will generally be okay and do not pose significant default risk.

It's the Investment-Grade-in-Name-Only or "IGINO" bonds that cause the biggest problem.  As we discuss in this blog post, Kraft-Heinz bonds had been rated investment grade even though Kraft-Heinz's financials have been terrible and substantially worse than bonds rated below investment grade.  The Kraft-Heinz bonds were beneficiaries of a bond ratings methodology skewed in the favor of global behemoths at the exclusion of smaller, nimbler, and better-run companies.

This brings us to the 'line of demarcation' in the bond ratings scale, which splits investment-grade bonds with bonds rated below investment grade, which are also known as 'high-yield bonds.'  Some refer to them as 'junk bonds,' but we have never used the word 'junk' to refer to a bond.  Many bonds rated below investment grade are great companies, but they are often small or the rating agencies could have a bias against the company's industry or management team.  For instance, until late 2019, Moody's had rated Expedia below investment grade even though the company has a history of strong growth and had more cash than debt.  Moody's reason for its ratings was that the company was controlled by Barry Diller, and that factor could result in higher leverage at some point.  Talk about grasping at straws and ignoring fundamentals.

As shown below, bonds with ratings above the green line are rated investment grade, and those below the green line are rated below investment grade.  The lowest investment-grade bond rating is Baa3/BBB- and the highest rating below investment grade is Ba1/BB+.  In certain cases, bonds could be rated investment grade by one rating agency and below investment grade by another.  Bonds rated this way are said to be "split rated."      

Bond Ratings Scale for Moody's and S&P

To put bond ratings into perspective, it's helpful for investors to see examples of corporate bond issuers and the ratings of each company:

Corporate Bond Ratings as of March 19, 2020
Microsoft: Aaa / AAA
Apple: Aa1 / AA+
Wal-Mart: Aa2 / AA
Pfizer: A1 / AA-
PepsiCo: A1 / A+
Caterpillar: A3 / A
Comcast: A3 / A-
Verizon: Baa1 / BBB+
Kroger: Baa1 / BBB
Ford Motor: Ba2 / BB+
Lennar: Ba1 / BB+
Albertsons: -- / B+

Keep in mind that bond rating agencies will assign different ratings to corporate debt with different levels of seniority.  For example, senior secured bonds would generally have a higher bond rating than senior unsecured bonds.  Term loans and revolving credit facilities that are secured by specific collateral such as real estate, inventory, or other hard assets would typically have higher ratings than unsecured bonds.  The above ratings are for the issuing companies' unsecured debt, which is typically the level in the capital structure in which we invest.

Why Bond Ratings Are Important
While bond ratings have many shortcomings, they are important for two key reasons: first, a bond's credit rating will determine how sensitive a corporate bond is to changes in underlying interest rates and, second, bond rating upgrades and downgrades can have a big impact on the price of a corporate bond.

Corporate bonds rated investment grade can be sensitive to changes in Treasury yields, as, on professional trading desks, these bonds are quoted as a spread to their benchmark Treasury.  As we discuss beginning at minute mark 1:37:38 in How Do Bonds Work?, a corporate bond that matures in, let's suppose, 2035, will trade as a spread to a US Treasury bond that also matures in 2035.  If the corporate bond has a yield to maturity of 3.5% and the benchmark Treasury has a yield of 0.75%, the corporate bond would have a 'credit spread' of 2.75% or 275 basis points.  The credit spread represents the extra yield (or compensation) an investor receives for taking credit risk that is greater than Treasury bonds, which many believe have no credit risk. 

As the Treasury yield moves up and down, so does the yield to maturity of the corporate bond, assuming the credit spread has not moved.  This is a crucial point for corporate bond investors to understand, as, while investment-grade corporate bonds generally do have a lower risk of default than high-yield bonds, they are generally more sensitive to changes in Treasury yields.  This is especially true for longer-dated bonds.

The other reason why understanding the bond rating scale is important is because most large bond funds can only hold bonds that have a certain rating.  For example, if the bond fund's charter says a bond fund can only own corporate bonds rated investment grade, if bonds in the fund are downgraded to below investment grade, that fund must automatically sell that bond.  This results in forced selling since many large bond funds must now sell a downgraded bond even if the bond is still a compelling value.  Bonds that are downgraded from investment grade to below investment grade are called 'fallen angels.'

Investors in individual corporate bonds must be mindful of the existence of ratings-driven investing.  When we consider bonds rated BBB and BBB-, we like to understand the downgrade threshold for that particular bond.  We want to know how badly the company can perform before its ratings are downgraded to below investment grade.  It's important to know this as a bond investor because, in the event of forced selling by large bond funds, fallen angels will fall in price, and sometimes the price reductions can be significant.

Often times, we find compelling bond investment opportunities in corporate bonds rated just below investment grade.  These bonds are not sensitive to changes in underlying Treasury yields and, if these bonds are upgraded to investment grade, it can have a very positive impact on the bond price, as now a wider range of bond funds can buy the bond.  Of course, these bonds can still be downgraded from BB to B, but investors won't witness the level of forced selling that occurs when a corporate bond becomes a fallen angel.

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What Are Some Advantages of Corporate Bonds?

There are many advantages of corporate bonds relative to other investments.  Individual corporate bonds offer investors strong returns but with less downside than stocks.  They offer greater transparency than bond funds and ETFs, as you know precisely the security in which you are investing and can invest according to your risk tolerance and investment returns objectives.  If you own an individual corporate bond, you pay a fee when you buy it and if you sell the bond prior to maturity.  This fee structure can offer considerable savings to the recurring fees investors pay when investing in bond funds and bond ETFs.

We believe there is far greater financial reporting transparency for corporate bonds compared to municipal bonds, as corporate bond issuers are required to report their financial performance quarterly and have other reporting requirements when material events occur at the company.  Municipal bond issuers have far less stringent financial reporting requirements.  Taken together, we believe investors can better assess the value of a corporate bond than a municipal bond since there is a far greater level of financial information available to corporate bond investors.  This presents opportunities for corporate bond investors to achieve strong capital appreciation, and, as a result, after-tax returns that can exceed those of municipal bonds.

Please click here for a detailed comparison of the advantages of individual corporate bonds vs. municipal bonds.

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Where Can I Buy Corporate Bonds Online?

Corporate bond investors can buy bonds online from a number of online brokers, including Fidelity Investments, E*TRADE Financial, Charles Schwab, and Vanguard.  Bond investors benefit from many advantages when they buy bonds online, including:

1) See the largest amount of corporate bond quotes and minimize bid-offer spreads
2) Pay the lowest fees
3) Enjoy fast and efficient trade execution   

Above all, what buying bonds online does is promote transparency and fairness.  Bond investing has come a long way from where it was 25 years ago.  Today, bond investing is a technology-enabled marketplace where individual investors can typically execute trades at bond prices just as good as the world's largest bond investors, as BondSavvy founder Steve Shaw presented to the SEC

Corporate Bond Investing: Then and Now
Photos licensed from Shutterstock

In the old days, individual investors would call a broker, and the broker would provide a list of corporate bonds and the bond prices at which they were available.  There was virtually no way for individual investors to know if they were getting a fair price.  Today, individual investors have all the information with the click of a button.  They can see how many dealers are providing bid-offer quotes for a particular bond CUSIP and can view TRACE (the Trade Reporting Reporting and Compliance Engine, which is operated by FINRA) to see historical trades for corporate bonds and how they compare to bond prices offered in the market.

We discuss details of the advantages of buying bonds online later in this post.


Out of the online brokerage firms, we recommend investors who buy bonds online to have accounts at two brokerages: Fidelity and E*TRADE.  Both bond-trading platforms offer a full bond inventory with up to 9,000 individual corporate bonds, quality trade execution, and competitive fees.  The primary reason for having accounts at two online brokerages is to ensure you are receiving the best price possible for the bonds you buy and sell.  While bond inventory can be similar across online brokerage firms, certain brokerages have different rules with respect to what bond price quotes investors can see.  Some brokerages may be more conservative with respect to certain high-yield bonds and may not show all -- or any -- bond price quotes for certain individual corporate bonds.  During the peak of the COVID-19 crisis in March 2020, we saw numerous cases where certain online brokerages were showing quotes for a corporate bond and others weren't showing any bond price quotes.  

Vanguard also offers a good bond-trading platform; however, for accounts less than $500,000, its bond transaction fees are double those of Fidelity and E*TRADE.  Vanguard fees are $2 per bond, while Fidelity and E*Trade charge $1 per bond regardless of account size.  Charles Schwab also offers a good bond-trading platform; however, based on our last review of the Schwab bond-trading system, it doesn't show customers the live bid side of a corporate bond price quote prior to purchasing the bond, which makes it very difficult to evaluate the level of liquidity available in a corporate bond.  In our view, seeing a bond's live bid-offer spread is an important part in determining which corporate bonds we recommend to BondSavvy subscribers.  We believe, generally speaking, in selling bonds prior to maturity to maximize investment returns, so knowing the depth of bid quotes on corporate bonds is key to our bond investment analysis.

While BondSavvy is not affiliated with either Fidelity or E*TRADE, our founder Steve Shaw has led investor education webinars for both companies, including: 
  • August 6, 2019: Steve led a bond investing webinar on Fidelity titled "Rethinking Bond Investing," which you can view here
  • May 17, 2018: Steve led a bond investing webinar for Fidelity customers titled "The Case for Active Bond Investing"
  • November 6, 2018: Steve presented 'Active Corporate Bond Investing' to E*TRADE customers.  


Investors who buy bonds online benefit from many advantages.  It all begins with the number of bond price quotes available at online brokerages, which creates a competitive marketplace with many bonds from which to choose and typically narrow bid-offer spreads.  We discuss each of the key advantages investors who buy bonds online can enjoy:

See the largest amount of corporate bond price quotes and minimize bid-offer spreads
Online brokerages create a competitive market for your corporate bond investments by aggregating bid-offer quotes from over 100 dealers.  These dealers range in size and focus and include Bank of America, Interactive Brokers, Brownstone Investment Group, Sierra Pacific Securities, SumRidge Partners, Wells Fargo, and many more.  These dealers are not long-term investors but are rather 'market makers,' who generate profit through buying corporate bonds at the bid price and selling corporate bonds to investors at the offer price.  Typically, for each corporate bond available on an online brokerage, there will be five to twelve dealers providing live-and-executable bid-offer quotes.  The below example shows a depth of book for eBay bonds due in 2042 (CUSIP 278642AF0), illustrating how competitive the corporate bond market can be and the narrow bid-offer spreads individual investors can enjoy. 

Example of Corporate Bond Price Quotes: eBay 4.00% 7/15/42

* Depth of book shown on on January 22, 2020.

For the eBay bonds, in this example, 10 dealers were providing live bid quotes and 12 dealers were providing offer quotes.   This is a robust level of bond quotes, and not every bond will have this level of liquidity.  Generally speaking, bond issues with a greater amount outstanding will often have a larger number of bond price quotes, as these bonds often trade more actively than smaller-sized bond issuances.  That said, even bonds that are small in issuance size can trade actively, especially if there is news related to a particular bond issuer.    

A 'big issuance' would be a bond that had at least $1 billion outstanding.  This eBay bond had $750 million outstanding when the above quotes were available.  Bond issuance sizes of $300 million and less can be characterized with fewer available quotes and executed trades.  That said, there are many corporate bonds with small issuance sizes that trade actively and can have as many live bond price quotes as shown above.  Examples of such bonds include two Bed Bath bonds, one maturing in 2024 (CUSIP 075896AA8) and other Bed Bath bonds maturing in 2034 (CUSIP 075896AB6).  Both Bed Bath bonds are only $300 million in size but can, at times, trade more than 100 times in one trading day.  If a bond trades more actively, bond investors have a greater number of data points to determine they are getting a good price for a bond, as they can view TRACE-reported trades in their brokerage account and compare the live bond price quotes to recently executed corporate bond trades.

This is a far cry from the way the bond market worked decades ago, as corporate bonds today trade in a competitive marketplace with typically reasonably narrow bid-offer spreads.

In the eBay bonds shown above, the bonds were quoted with a bid-offer spread of 0.12 points, on a dollar-price basis, and 0.01 percentage points (or 1 basis point) on a yield-to-maturity basis.  Corporate bond bid-offer spreads can vary based on the maturity of the bond, how actively the bond trades, and the number of dealers providing bond price quotes.  Bonds with a long time to maturity, such as the eBay bonds, will often have wider bid-offer spreads on a dollar-price basis.  The reason for this is bonds with a longer time to maturity are more sensitive to changes in interest rates since changes in interest rates will impact the bondholder for a longer period of time than they do for investors in shorter-term bonds.  Watch this video to learn about how interest rate risk and credit risk impact how investors should evaluate corporate bond investments.

Click here to watch BondSavvy founder Steve Shaw present to the US Securities and Exchange Commission the current state of buying bonds online for individual investors.  You can read BondSavvy's accompanying letter to the SEC on this blog post

Please note the eBay bonds information was taken before Covid-19 set in and represent what bond quotes look like in 'normal' times.  For many corporate bonds, Covid-19 created historic bond price volatility that reduced the number of live quotes.  The corporate bond market has been getting back to a more normal situation, but it's important for investors to understand that, during extreme times such as the Covid-19 crisis, bond market liquidity can dry up quickly and it can be difficult to buy and sell bonds at compelling prices.   

Do all brokerages show customers competitive quotes?
Most online brokerages differ from traditional brokerages, as traditional brokerages, such as Merrill Lynch and Morgan Stanley, often do not enable customers to see all of the bond price quotes provided by third-party dealers (aka "Street Inventory").  They, instead, often only show customers corporate bonds their trading desks are quoting.  As a result, these customers often see less bond inventory at worse prices since they do not enjoy the benefit of competitive bond price quotes.

Pay the lowest bond trading fees
If a Fidelity customer was to purchase the above eBay bonds at a price of 100.094, Fidelity would 'mark up' the eBay bonds by 0.1 points, which is equivalent to $1 per $1,000 face value of bonds.  Since bonds are quoted as a percentage of their face value, a bond price quote of 100.094 means the value of the bond is $1,000.94.  With the $1 mark-up, the customer would pay $1,001.94 for each of the eBay bonds plus interest that has accrued on the eBay bonds from the last coupon payment date.

These fees are in sharp contrast to fees charged by traditional brokerages, which often charge a two-point markup for each bond.  For example, that same bond quoted at 100.094 would be often be shown to a customer of a traditional brokerage at 102.094 -- a two-point markup.  This fee is equivalent to $20 per bond, or 20x the amount charged on and other online brokerages.  These fees add up, as an investor would pay $2,000 to purchase a $100,000 face value bond portfolio and then another $2,000 if the investor elected to sell bonds prior to maturity.  Depending on how long an investor owns a particular bond, these brokerage fees could exceed bond fund management fees for a similarly sized portfolio.  Minimizing transaction and management fees is a key advantage investors receive when they buy bonds online.

In this blog post, we show how an investor would have saved approximately $48,000 in trading commissions if he were to buy bonds online rather than through a traditional brokerage.       

Enjoy fast and efficient bond trade execution
BondSavvy founder Steve Shaw is the former head of Tradeweb direct and a senior executive of BondDesk Group, two companies that built the technology for retail brokerages to buy and sell bonds online on behalf of their investor clients.  He saw firsthand the level of investment made to ensure fast and efficient bond trade execution.  Today, nearly all bond trades with a live quote are filled instantaneously, with order submission to trade execution typically taking less than one second.  Technology companies such as Tradeweb and ICE BondPoint and retail brokerages have invested heavily to make bond investing more fair and efficient for individual investors.  We expect this investment and focus to continue and for individual investors to be the beneficiary of improvements made to US corporate bond market trading.       

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What Corporate Bond Returns Does BondSavvy Seek To Achieve?

Many bond investors believe a bond's yield is the only return you can achieve.  Further, many media outlets such as CNBC often say "with the 10-year Treasury yielding 3%, why would you ever invest in bonds?," implying the only bonds one can buy are Treasurys.  Payment of a fixed coupon is one of the many advantages of owning corporate bonds; however, we focus just as much on buying bonds that can increase in value and achieve a strong total return.  Our goal is to recommend corporate bonds that, over a two- to four-year period, can achieve annualized rates of return of 7-9% for investment-grade corporate bonds and 10-15% for high-yield corporate bonds.

With strong capital appreciation, after-tax returns from corporate bonds can often exceed investment returns from municipal bonds given the more favorable tax treatment of capital gains compared to interest income.

When evaluating investment performance, investors should be wary of the prices they see on their brokerage statements, which do not show the bond's total return and often undervalue the bond held.  The price shown on an investor's statement is called "an evaluated price," which is an estimated price at which a large institutional money manager could sell the bond.  Investors owning smaller quantities can often achieve better price execution than investors needing to sell $1 million plus of bonds, so always check a bond's depth of book to see what the current market price of your corporate bond is.

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What Is BondSavvy Live?

BondSavvy Live is a bond investing education webcast exclusive to BondSavvy subscribers.  Prior to each edition of BondSavvy Live, BondSavvy subscribers submit corporate bond investing questions to BondSavvy founder Steve Shaw, which he then answers during the BondSavvy Live webcast.  Many BondSavvy subscribers are new to bond investing, so many questions are about bond investing basics.  There are also a good number of questions about current corporate bond investment recommendations and other advanced bond investing topics.  Please watch a previous edition of BondSavvy Live on this page.  Please note that this webcast was previously known as BondSavvy Office Hours.

What Corporate Bond Research Does BondSavvy Provide?

BondSavvy provides CUSIP-level corporate bond research, which includes between 20-25 new corporate bond investment recommendations each year.  Many investors and investment advisors do not have the time to read 10-Ks and listen to company earnings calls and do the financial analysis necessary to determine which corporate bond investments can outperform the market.  We do all of this work for you and provide the information investors need to make successful corporate bond investment decisions.

BondSavvy determines which investments present the most compelling risk-reward investment opportunities.  After we make an initial investment recommendation, we monitor company earnings releases, SEC filings, and bond performance to determine if an investment recommendation has changed.  We then advise subscribers to either buy more of the same bond, reduce holdings, or to sell all remaining bonds of that CUSIP.

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How Is BondSavvy Different from a Bond Investment Newsletter?

Many bond investment newsletters publish lists of hundreds of bonds and leave it up to subscribers to weigh the risk and potential returns of each investment.  Other bond newsletters focus on all income products, including preferred stocks, REITs, dividend stocks, muni bonds, you name it.  These bond newsletters are jacks of all trades, but masters of none.

BondSavvy is better than a traditional bond newsletter.

BondSavvy only makes recommendations for individual corporate bonds.  We narrow down the corporate bond investment universe and make 20-25 corporate bond recommendations each year, which we present during The Bondcast, a subscriber-only webcast we host every quarter.

BondSavvy has many advantages over other investment newsletters and corporate bond research sources:
  1. All of our corporate bond recommendations are made at the bond, or CUSIP, level
  2. We make our investment recommendation presentations through The Bondcast, an interactive subscriber webcast where subscribers can ask questions about each corporate bond recommendation
  3. We regularly update our previous investment recommendations through our bond newsletter and subscriber webcasts. Our bond recommendations do not get stale like traditional investment newsletters do
  4. We analyze all aspects of a corporate bond investment when making a recommendation: potential for capital appreciation, yield relative to comparable bonds, credit risk, interest-rate risk, business and financial analysis of the issuing company, and the trading activity for each bond CUSIP we recommend.  This analysis is far more comprehensive and actionable than bond ratings, which only evaluate credit risk and, as we discuss in this blog post, bond rating methodologies are flawed
  5. BondSavvy subscribers have email and phone access to our founder, Steve Shaw
  6. Unmatched expertise in evaluating individual corporate bond investments for self-directed investors
Our goal is to maximize the total return of each corporate bond investment recommendation, and this often includes selling bonds prior to maturity to maximize the capital appreciation and after-tax total return of our corporate bond investments.  We recommend when subscribers should buy corporate bonds and when they should sell our previously recommended bonds.

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What Role Do Individual Corporate Bonds Play in Income Investing?

Individual corporate bonds are a crucial component of income investing as they provide yields generally higher than Treasury bonds, muni bonds, and stocks. Investors can choose from a wide variety of bonds based on their risk tolerance and investment return objectives.

Owning individual bonds helps income investors create a more precise investment plan than is possible with bond funds and ETFs.  When you own an individual corporate bond, you have a contract with the bond issuer to pay you a fixed rate of interest and to return your principal at maturity.  This enables investors in individual corporate bonds to build a reliable income stream, as compared to bond funds and ETFs, whose income streams are less predictable since the underlying holdings can change over time.

What's more, many income investors have used dividend stocks as a primary source of income investing.  Unfortunately, with the COVID-19 health and financial crisis, scores of blue-chips companies have either suspended or significantly reduced their dividends.  Companies that have suspended or reduced their dividends include: Disney, Boeing, Ford, Delta Airlines, Freeport McMoRan, Macy's, Darden, Anheuser-Busch, Nordstrom, and many more.  All of these companies continue paying interest on their bonds, which shows why corporate bonds are such an important part of income investing.

A key benefit to BondSavvy's approach to corporate bond investing, is that we seek to complement the income investing portion of a corporate bond's return with capital appreciation by recommending what we believe are undervalued corporate bonds that can increase in price and achieve strong total returns, as we show in the BondSavvy returns summary.  

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What Credit Analysis Does BondSavvy Conduct When Evaluating Investments?

BondSavvy identifies undervalued corporate bonds it believes can outperform the market.  To identify these corporate bonds, we must understand how bonds are priced relative to their credit risk and interest-rate risk.  Please see the below slide that was part of the May 31, 2018 edition of The Bondcast.  It reviews the key metrics we examine when evaluating corporate bond investments.  Below the table is a description of the select terms.  Click here to view this sample edition of The Bondcast.

Leverage Ratio: 
Total debt divided by EBITDA. If this ratio is low (1-2x), it means the company has a low amount of indebtedness (“leverage”) relative to its earnings. High-yield issuers have higher debt levels relative to earnings and have Leverage Ratios typically between 4-8x. Note that “EBITDA” is an acronym for Earnings Before Interest, Taxes, Depreciation & Amortization. It shows how much cash a company generates from operations and what it has to pay its interest, taxes, and capital expenditures.

Interest Coverage Ratio:
EBITDA divided by interest expense. The higher this is, the more cash flow a company has to pay its interest expense. If Interest Coverage is low, a company may have difficulty paying interest if its business hits a rough spot. Interest Coverage is usually 2-4x for high-yield issuers and often over 10x for investment-grade issuers. 

Upcoming Maturities
If a company doesn't have a bond maturing for seven years, chances are it's going to be money good between now and then unless the company can no longer cover its interest payments.  If, however, a company has many near-term maturities, is struggling financially, and has questionable ability to refinance its upcoming maturities, bondholders can be in for a tough ride.

We want to understand all sources available to pay for interest expense, capital expenditures, and upcoming debt maturities.  To do this, we evaluate the company's cash on hand, investments, and capacity on any bank lines of credit.

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