With a plethora of ways to analyze bonds, it might make your head spin. Even so, evaluating the potential risk before you buy and calculating your potential returns is an essential step in the process of acquiring bonds.
1. Evaluate All Potential Risks
You should pay attention to all the details – interest rates, inflation, how easy it is to sell that particular bond, you name it.
2. Credit Risks
It doesnt matter what kind of bond you choose to invest in, there is always a credit risk. In 1995, U.S. Treasuries, considered the gold standard of bonds were close to default for the first time in history. For corporates and municipals the risks are even greater, running everywhere from the AAAAaa to B and below. These are often called junk bonds.
3. Bond Evaluation Checklist
– What is your earning potential?
– What is the current earnings per share?
– What is a typical divident payment?
– What is the outstanding debt?
– What forseeable technological changes might affect this bond?
– What is the track record of management?
4. Dividends
As debt loads grow,...
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