![]() ![]() ![]() Interest coverage ratio – Reflects how many times the issuer can pay interest on debt obligations, using its operating income (or earnings).A declining ratio is better than an increasing one because it implies the company is paying off its debt and/or growing earnings. A higher ratio suggests that the company may have more difficulty servicing its debt. Debt to operating income ratio – Indicates the ability of a company to pay its debt using operating income.If debt to equity ratio is more than 2, it means that to finance its operations, the issuer has more than twice the amount of debt compared with equity. A high level of debt suggests higher risk. Debt to equity ratio – Measures how much debt an issuer is using to finance its assets and operations, as compared with the issuer’s equity. ![]() Some useful financial credit metrics that you could look out for are: One way is to look at the company’s solvency ratios such as interest coverage ratios and other credit metrics. This will help you to examine if the company is able to meet its debt obligations, including the bond you may be considering. You should find out more about the issuer, profitability of the business and track record of prior bond issues, if any. Furthermore, as the ratings are based on information available at the time the rating is assigned, they are subject to revision or withdrawal.Īs an issuers’ credit worthiness can change quickly, there is no assurance that any revisions to the ratings will be made in a timely manner. They are only statements of opinion by the relevant credit rating agency and are not recommendations to invest. For example, if the issuer feels that their target investor markets are sufficiently familiar with them and may even regard them as being more creditworthy than a credit rating may have suggested.įor the same reason, smaller and less frequent issuers may also not want to bear the cost of rating fees if the bonds are meant for a domestic market that already knows them.įor such unrated issuers and bonds, you should consider other measures of the issuer’s creditworthiness and the characteristics of the bonds when deciding whether to invest in the issuer’s bonds.Ĭredit ratings have their limitations and should not be your sole consideration when deciding whether a bond should be included in your investment portfolio. Some bond issuers may not seek a credit rating. Not all bonds are rated by international or major rating agencies. The coupon rates for different bonds will vary based on the credit quality of the issuer and the credit rating. Are able to monitor or evaluate (either by yourself or with the help of a financial adviser) changes in economic or other factors that may affect the issuer or the bonds.Have sufficient financial resources and liquidity to bear all the risks of investing in the bonds or holding the bonds to maturity, including losing all or a substantial amount of the capital invested.Are able to evaluate the investment in the bonds and how such investment will impact your overall investment portfolio.Understand thoroughly the terms and conditions of the bonds.In particular, you should consider whether you: You should consider the suitability of an investment in bonds in light of your own circumstances. The potential capital gains or losses if the price of the bond becomes higher or lower than the price you initially paidīonds may be attractive for investors who desire a source of regular income, or are looking to diversify their portfolio of investment assets.The coupon that you will receive over the life of the bond.Hence, in deriving a bond’s return, you will have to consider: It is important to note that while the coupon rate is generally fixed through the life of the bond, the price of the bond may vary. You can earn capital gains if you sell the bonds at a higher price than the price you bought them at. These are the coupon payments you receive as an investor. Upon maturity, the bonds are redeemed and you are paid back the face or par value. Coupon rates are typically expressed as a percentage of the principal amount, which is also known as the “face” or “par” value. Most bonds pay a regular stream of income throughout their life, also known as a coupon. When you invest in bonds, you are lending money to the issuer for a fixed period of time. Governments and companies issue bonds to raise funds (borrow money). When interest rates rise, you will likely see a fall in bond prices, and vice versa.Ī bond is a debt security.You can expect to be repaid the principal amount when the bond matures, provided that the bond issuer does not default.When you invest in bonds, you are lending money to the bond issuer at an agreed interest rate for a set period of time. ![]()
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