Why compare 2 bonds for investment?
Recommend a bond for investment by your advisor? Before you invest you may also want to compare the bond shortlisted to similar bonds in the market to understand if you are investing in the right bond. A comparison with another bond will give you a basis of the primary considerations that will go into your investment.
A comparison will also get you to ask the right questions to your advisor who recommended the bond for investment.
Like to like bonds
The 1st principle of comparison is 2 bonds should be like to like as in they should carry similar risk profile. Comparing a corporate bond to a.G-sec is not a right comparison as gsec is risk free in terms of default risk while corporate bonds carry default risk.
2 g-secs can be compared while 2 corporate bonds can be compared. Within gsecs, considerations for comparison are yield and maturity and maybe liquidity while for corporate bonds it will be credit rating, bond structure and sector apart from yield, maturity and liquidity.
Other consideration can include taxable/tax-free, listed/unlisted, secured/unsecured, senior/subordinate, nature of ownership of issuer such as PSUs or State-owned issuers.
Market factors for comparison
Many corporate bonds with similar ratings, maturity and of the same sector will be trading at different yields in the market. This is due to market perception of the risk of a bond and markets will assign higher risk to one bond than the other. This is important as markets are 10 steps ahead of anyone else who plays a role in determining the risk of a bond. Going for value may not be a right choice in most cases.
Factors like equity prices of issuers if they are listed, credit derivatives levels if there are derivatives traded on the issuers are also good market factors to analyse.
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