Question

If you had $10,000.00 to invest what kind of bond would you purchase and why?

Answer 1

The kind of bond that I would purchase would be based on 3 factors:
1. The return I seek on my invested capital of $10,000. and,
2. The level of risk I would be willing to take.
3. The period (time horizon) of my investment.

• If I am looking for very high returns even if that means taking high risk, I would buy BB, B or CCC rated (S&P and Fitch) bonds only which offer the highest rates.
• On the other hand, if wanted moderate returns with very little risk, I would only buy investment-grade corporate bonds which are AAA, AA, A or BBB rated as they offer good returns at very low risk.
• If preservation of the $10,000 is the most important thing, then I would only go for risk-free government bonds.

I would also try to roughly select the maturity of bonds equal to my investment horizon if long term rates are higher than short term rates (normal yield curve). If long term rates happen to be less than short term rates, I would rather prefer to buy short term bonds as such an inverted curve usually implies an impending recession.

As a personal preference, I would go for a mix of investment-grade corporate bonds for around 60% to 70% of my capital and remaining investment will be done in government bonds. The duration of bonds will be in the range of 5 to 10 years.

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