Where should I invest once CDs mature?

Q: I have several certificates of deposit coming due in the next couple of months and would like your suggestions on where to invest the money.

I like to invest on my own, but I don't know much about corporate bonds. Would they be a good option for someone wanting income and little-to-no risk?

A: Six months ago it didn't make any sense to invest in corporate bonds versus CDs, because the yields were very similar. CDs are extremely safe and up to certain dollar limits are insured by the FDIC.

Corporate bonds have no such insurance and therefore carry more risk.

But the spread -- the difference between CD interest rates and yields, or interest paid -- on corporate bonds has increased enough to consider making corporate bonds part of a fixed-income portfolio.

The following explanation will help you begin to understand these bonds and what to weigh. But you may want to hire a professional bond broker or buy a mutual fund specializing in corporate bonds if you decide that this asset class would be a good addition to your portfolio.

Corporate bonds are debenture, which means they are not secured by collateral. That means that if a corporation defaults on its debt, the owner of the bond may be left with nothing. You can help reduce this risk by knowing the credit ratings of the corporate bonds you are considering for purchase. Credit-rating agencies provide a good guide for evaluation, but there is also some research you should do on your own.

The main credit agencies are Moody's, Standard and Poor's and Fitch. Ratings on bonds range from high-quality investment grade to low-quality highly speculative, which are often referred to as junk bonds. Ratings vary by agency, so know which agency's rating you are looking at when determining the investment grade of the bond.

As with any investment, the higher the rating, the less risk you have of losing money. The lower-risk bonds will have a lower yield than junk bonds. If you decide the higher yield is worth the risk of buying junk bonds, a well-diversified high-yield bond fund may be the best place in which to invest.

It's wise to go beyond credit-agency ratings when buying individual bonds. Analysis of a bond's risk can take many forms, but the two main methods are capitalization ratios and interest-coverage ratios.

A capitalization ratio will tell you how much debt the company is carrying relative to the value of its assets. This ratio is derived by taking the long-term debt and dividing it by total assets; the lower the ratio, the better.

This is similar to determining an individual's credit worthiness. A person with $200,000 in debt and $200,000 in assets would have a ratio of 1. A person with $100,000 in debt and $200,000 in assets would have a ratio of 0.50.

Which person would you rather lend money to? If you are evaluating bonds with similar maturity dates, credit ratings and yields, the one with the lower capitalization ratio should be a better investment.

Interest-coverage ratios tell you how much money a company will need to generate each year to pay the interest obligation on its debt. The most common ratio of this type is EBIT, or earnings before interest and taxes, divided by annual interest expense. The higher the ratio, the better. You want to lend money -- in the form of buying bonds -- to a company that earns more than enough to service its annual debts.

Currently, there are some investment-grade corporate bonds with a yield to maturity in three years of 4.5 percent. One of the highest rates for a three-year CD is 3.8 percent. If you determine that the difference is worth the risk, the fixed-income portion of your portfolio could get a nice boost from the addition of corporate bonds.