High Interest Corporate Bonds

A lot of people are attracted to the high interest corporate bonds. Why? Because the higher the interest corporate bonds give, the higher the monthly (or quarterly) income the corporate bond owner receives. However, there are many drawbacks to high interest corporate bonds.

High interest corporate bonds vs high yield corporate bonds

Firstly, high interest corporate bonds are not the same as high yield corporate bonds. A corporate bond can have very high interest rate and have poor yield. If you see a corporate bond with, say, 15% interest rate, then you will think this is a high interest corporate bond that will give you a lot of money per month.

While it is true that high interest corporate bonds will give you higher monthly income, you need to think about the cost of keeping or buying those corporate bonds.

Cost of buying high interest corporate bonds

First of all, you need to think of why the corporate bond has such high interest. Usually corporate bonds are set competitively. The reason why some corporate bonds have higher interest rates than others may be because there are cons and negatives that come with the corporate bonds.

For example, the corporate bonds may be sold at high premium value. This is common because many people want the high interest rates so they are willing to pay more for the bonds. If you are buying a high interest rate corporate bond at large premium, then the end result is that you are not getting such a good deal. You are paying for the high interest payment upfront. If you calculate the yield of this corporate bond, you will realize that it is not such as good buy.

Another example of why a corporate bond has high interest rate is that the issuer may be in financial trouble. The instability prompts the issuer to issue corporate bonds with very high interest rates to attract investors. These corporate bonds will not have high ratings by Moody's or S&P. So, you are basically gambling and investing in risky corporate bonds. If you know the ratings and still want to invest and gamble with your money, then you can look into investing in these high interest corporate bonds. But, make sure that you know what you are doing and what the risks involving these high interest corporate bonds are.

Compared to high yield corporate bonds, high interest corporate bonds are for short term investing, emergency cash rather than long term investments because the issuer of the bond may go bankrupt leaving you with nothing. Before investing in a corporate bond, you should calculate the yield of the bond, rather than looking at the interest rates alone.