buying corporate bonds

Aug 19, 2010 1 Replies

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anoop 15 years ago

It looks like there are 10-year corporate bonds being offered at around 4.5 - 5% by banks such as Goldman Sachs and Bank of America. Would folks here recommend buying these in a retirement account, or would they be considered too risky given the current economic environment?

I've never bought bonds before (other than T-bills, I-Bonds and TIPS), so this is something new for me. If I plan to hold it to maturity, is the only risk that I face the risk of default (i.e. the bank or corporation going bankrupt)?

Thanks, Anoop

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dapperdobbs 15 years ago

On a thumbnail, the parameters I know of are % debt levels < 50%, times interest covered >4x, and a manageable dividend payout ratio that has been steady < 70%. Revenues and earnings should be at minimum stable, better with steady growth. These can all be found in Value Line at the library. If you're concerned about the bank you buy from, make sure you know what you are buying and can transfer to your segregated brokerage account.

A tax-free retirement account would be a good place for the interest to accumulate, but as far as I know, you can't compound it without additional discreet purchases of bonds. I'm not good with bonds, but you might in this case check into a fund that allows for the compounding of interest, comparing cumulative totals and taxes due on withdrawal.

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