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Look to the corporate bond market if you’re wondering about the rewards you get from taking on extra risk.

A well-diversified short-term corporate bond ETF would get you a forward-looking yield of about 2.5 per cent these days. If you check out individual corporate bonds that just make the cut for being considered investment-grade, you’ll find yields from a variety of issuers of between 3.5 and 3.9 per cent. Here are some examples found the week of March 19-23 at one particular online brokerage firm:

Example One: The 3.75 per cent Cameco Corp. bond maturing Nov. 14, 2022, which offered a yield of 3.9 per cent. The rating was BBB (high). Note: 3.75 per cent is the coupon, or the yield based on the price of the bond when issued. Yield is based on current market price.

Example Two: The Granite REIT Holdings LP 3.873-per-cent bond maturing Nov. 30, 2023. The yield was 3.8 per cent, and the credit rating was BBB.

Example Three: The Fairfax Financial Holdings Ltd. 4.5-per-cent bond maturing March 22, 2023. The yield was 3.4 per cent, and the credit rating was BBB (high).

Example Four: The Inter PipeLine Ltd. 2.608-per-cent bond maturing Sept. 13, 2023. The yield was 3.3 per cent, and the credit rating was BBB (high).

A bond must have a BBB rating or higher to be considered investment grade. Technically, the lowest rung on the investment grade ladder is BBB (low) or BBB-minus. Default risk has to be considered with bonds at this level, though it’s not as serious as it would be if you were investing in a high yield bond rated BB or lower.

The yield penalty for sticking to A-rated bonds is roughly about 0.5 of a percentage point. Take the Brookfield Asset Management 4.54 per cent bond maturing March 31, 2023, as an example. It’s rated A (low) and offered a yield of 3.3 per cent. The TMX Group Ltd. 4.461 per cent bond maturing Oct. 23, 2023, is rated A (high) and offered a yield of 3 per cent.

For simplicity and diversification, own an exchange-traded fund holding corporate bonds or a well-priced bond mutual fund. The drawback to doing this is that the diversification of these ETFs tends to produce average yields. An ETF might include that Cameco bond mentioned earlier, but also lower-yielding bonds with higher credit ratings. Holding individual corporate bonds ramps up your yield, but also your risk.

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