Apple Inc. (AAPL): Buy iBonds?

Google Inc (NASDAQ:GOOG) is also a suitable comparable. While the company is rated AA by S&P, Google Inc (NASDAQ:GOOG)’s notes are priced as high-quality AAA. The yield to maturity on a three- and eight- year Google Inc (NASDAQ:GOOG) bond are 0.75% and 2.38%, respectively.

Given the friendly lending climate, expect Apple Inc. (NASDAQ:AAPL) to receive a warm reception from the debt market.

Should you buy iBonds?

While most yield-starved income investors will likely line up for a piece of Apple’s debt issue, smart investors should stay away.

The risk/reward for these corporate bonds aren’t attractive. Assume a 10-year iBond yields 2.5%. If interest rates rise to 4.5%, a real possibility, iBonds could lose nearly 20% of their value.

Lots of things could cause yields to rise suddenly: interest rates could return to historical norms, Apple Inc. (NASDAQ:AAPL)’s business could deteriorate, or inflation could pick up slightly.

In exchange for this risk, investors are only being compensated with a 2%-3% nominal yield. Your real return after inflation and taxes: roughly 0%.

In comparison, Apple equity is incredibly cheap. Backing out the cash on the company’s balance sheet, the market is valuing Apple’s entire business at less than seven times earnings. In addition to a 3% yield, equity investors also better protected against inflation.

Warren Buffett is right. Bonds should come with a warning label.

The article Should Investors Buy Apple’s ‘iBonds’? originally appeared on Fool.com and is written by Robert Baillieul.

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