[Power to Increase] Should I buy high-interest corporate bonds? High interest rates are the price of the 'probability that promises will not be kept.' Check the underlying risk …

I came across a consultation like this.

“Interest rates are rising, and I often see advertisements for corporate bonds issued to individuals. Some exceed 4% per year, which is much higher than bank deposits, so I am interested. Since they are famous companies, I don’t think they will go bankrupt, but is it safe to buy them?”

To conclude, a high interest rate is simply the price of the ‘probability that promises will not be kept.’ Before buying, look at the company’s credit rating and check how often companies with the same rating have failed to keep their promises in the past. Compare whether the added interest rate is worth that risk to make your decision. Also, no matter how high the credit rating is, do not put a large amount of money into a single company.

Corporate bonds are a promise to ‘lend money to a company’

Buying corporate bonds means lending money to a company. In exchange for borrowing money, the company makes two promises.

1. Pay interest on the specified date

2. Repay the borrowed money (principal) when it reaches maturity

As long as these promises are kept, corporate bonds are a welcome product that allows you to receive higher interest than bank deposits.

Failure to keep a promise is called default

When a company’s performance deteriorates and it can no longer keep its promises, it is called a default. When this happens, interest payments stop, and the principal may not be returned in full.

What you want to remember here is that the higher the interest rate of a corporate bond, the higher this risk. From the perspective of the lender, it is not worth it unless you receive high interest from a risky party. Therefore, the riskier the company, the higher the interest rate it sets to collect money.

The correct way to view this is not ‘it’s a good deal because the interest rate is high,’ but rather ‘the interest rate is high because it is that risky.’

Also, even among corporate bonds from the same company, there are some where the repayment priority in an emergency is lower than usual (subordinated bonds). Because the priority is lower, the interest rate is higher, but the risk that the principal will not be returned also increases.

How often have promises been broken in the past for each credit rating?

A credit rating indicates how likely a company is to keep its promises. Specialized companies called credit rating agencies assign symbols in order from the top.

The useful thing about credit ratings is that you can check ‘how many companies with the same rating have failed to keep their promises in the past.’

According to statistics from 2000 to 2024 published by a domestic credit rating agency, the percentage of cases where promises were not kept within 5 years is as follows.

You can see that there is a significant difference in the order of magnitude between the top three and the bottom three.

However, this is a historical average. The corporate bond you are thinking of buying now will not necessarily follow these percentages. Also, there is not just one rating agency, and even for the same company, ratings can differ depending on the agency. It is also important not to rely solely on one rating.

My own rough estimate: Comparing the added interest rate with the loss when a promise is broken

Let’s compare using numbers. The interest rate and the percentage returned when a promise is broken are all assumptions.

• Lending 1 million yen for 5 years

• Comparing against a safe place with a 2% annual return

• Assuming that if the promise is broken, 40% of the principal is returned (60% is lost)

For an A-rated company at 4% per year

Interest earned above a safe place: (4% – 2%) x 5 years = approx. 100,000 yen
Estimated loss if the promise is broken: 1 million yen x 0.31% x 60% = approx. 1,900 yen
The added interest is much larger

For a BBB-rated company at 5% per year

Interest earned above a safe place: (5% – 2%) x 5 years = approx. 150,000 yen
Estimated loss: 1 million yen x 2.22% x 60% = approx. 13,000 yen
The added interest is still larger

For a B-rated company at 8% per year

Interest earned above a safe place: (8% – 2%) x 5 years = approx. 300,000 yen
Estimated loss: 1 million yen x 53.66% x 60% = approx. 322,000 yen
The estimated loss is larger than the added interest

As the rating drops, even a high interest rate may no longer be worth it. If you choose based solely on the high interest rate, you might end up getting involved with products like those in the bottom tier.

Since these numbers are assumptions, please try substituting them with the interest rate and rating of the corporate bond you are considering.

Even if the average is small, do not put all your money into one company

The calculation above is about ‘on average.’ The rate at which promises are broken for single-A is a small 0.31%, but if the one company you bought happens to be one of them, you will lose 600,000 yen out of 1 million yen.

Even if the average is small, the damage when you get hit is large. This is the characteristic of corporate bonds where you lend to a single company.

• Do not include money for living expenses or money you plan to use within a few years.

• Only put an amount into a single company that would not change your life or plans even if you lost more than half of it.

• Even if you are interested in corporate bonds, first consider methods that allow you to invest by diversifying across many companies.

Three things to check before buying

1. What is the credit rating?: If there are ratings from multiple rating agencies, consider the lower one.

2. Is the repayment order normal?: If it says ‘subordinated,’ the order is lower.

3. How much are you putting into that one company?: Is it an amount you wouldn’t be troubled by losing?

Until you can answer these three things, please do not decide based solely on the interest rate figure.

Increase easy-to-understand asset locations by reviewing monthly expenses

Rather than putting a large amount into corporate bonds, it is more certain for most people to gradually increase savings diversified across many companies. You can create the capital for this by reviewing your fixed costs.

For example, if you stop a service you aren’t using that costs 980 yen per month, you will save 11,760 yen per year. Even if it looks small, every year, the amount of money you can explain the contents of yourself will increase by that much.

You can use apps like this to review your monthly payments all at once.

If you increase your savings amount at the same time you cancel, you won’t forget.

Practice Memo

• When you see a corporate bond advertisement, check the credit rating before the interest rate.

• Look at the past default rates for each credit rating and compare them with the additional interest rate.

• Check if it says ‘subordinated’.

• Only put an amount into one company that you wouldn’t be troubled by losing even if you lost more than half.

• What to do today: If there is a corporate bond you are interested in, check the company’s credit rating with two credit rating agencies (10 minutes).

How bond prices move when interest rates rise is summarized here.

Summary

The high interest rate of a corporate bond is not a bargain; it is the price of the probability that the promise will not be kept.

• You can check the historical default rate for each credit rating (0.31% for single-A over 5 years, 61.54% for triple-C or lower).

• Compare the additional interest rate with the expected loss. If the credit rating is low, it may not be worth it.

• Even if the average is small, do not put all your money into one company.

First, start by checking the credit rating of the corporate bond you are interested in.

*This article is intended to provide general information and does not evaluate or recommend any specific corporate bonds or companies. The rates for each credit rating are based on past statistics and do not guarantee the future. Investments carry the risk of loss of principal.

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