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Ask the Expert: Corporate bonds

August 17, 2010

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: What is the rate on corporate CDs/bonds, what is the minimum investment, and what is the length of the term?

A: First of all, be careful to make a clear distinction between CDs and corporate bonds. Corporate bonds are not FDIC-insured, and both principal and interest are subject to a substantial level of market risk, including regular fluctuations in price and the possibility of default.

Yields on short-term corporate paper are currently less than average CD yields, which would make CDs a clearly better choice for the average person--especially since you could do much better by shopping for the best CD rates, and even many savings accounts and money market rates are better than short-term corporate bond yields.

Longer-term corporate bonds do offer much higher yields--as of this writing, over 4.5 percent for high-quality bonds and even more for lower-quality bonds. However, there are some drawbacks.

Because corporate bonds depend on the financial condition of the issuer, they expose you to some of the economic and company-specific risks of stocks, but without the upside of stocks. At the very least, you wouldn't want to depend too heavily on any one corporate bond. They can make sense as part of a diversified portfolio, but that would involve having a substantial amount of money invested since, as a practical matter, trading corporate bonds in small lots can get very expensive.

You could diversifiy more efficiently by investing in a corporate bond fund, but in that case you must play close attention to the fees you pay. Avoid anything that involves a front- or back-end load, and make sure that the annual fees and expenses don't erode the yield of the fund so much that it isn't worth it.

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