Corporate Bonds
What are Corporate Bonds?
Corporate Bonds are debt obligations issued by private and public corporations with maturities ranging from 1 to 30 years. They are generally issued in multiples of $1,000. Companies use the funds raised by corporate bonds to build facilities, purchase equipment, finance special projects, and expand their business. When you buy a corporate bond, you are lending money to a corporation and you are entitled to interest payments semi-annually, quarterly, or monthly until the bond matures and the principal investment is repaid. Your investment in a corporate bond makes you a creditor, not an owner of the corporation.
Who invests in Corporate Bonds?
Corporate bonds are traded both on the New York Stock Exchange (NYSE) and in the over the counter (OTC) market. Investors in corporate bonds include individual investors and large financial institutions, such as pension funds, insurance companies, and banks.
Why would you want to buy corporate bonds?
Some of the reasons are listed below.
- Attractive Yields: Corporate bonds are attractive to the investor because they offer higher yields than most U.S. Treasury or municipal bonds.
- Estate Put Features: Some corporate bonds offer this feature in the event of an investor’s death. Prior to maturity, this estate-planning feature allows the estate of the beneficial owner the right to sell the note back to the issuer at par. (Limitations apply. See issuer prospectus or offering circular and related prospectus or offering circular supplement(s) for complete details).
- Dependable Income: Corporate bonds are a good choice for investors who wish to have dependable income while maintaining safety of principal.
- Safety: As an investor, you want to be sure that you will get your investment back at some specific date in the future. A bond's credit rating is a good tool to measure the safety of the bond. The higher a corporate bond's credit rating, the safer the investment. Also, if a company is liquidated, bondholders have priority over stockholders and are more likely to be paid.
- Diversity: Corporate bonds provide the opportunity to diversify your portfolio by distributing the risks inherent in individual investments across different risk profiles. This minimizes the impact to your portfolio if one security or sector performs poorly.
- Marketability: Due to the size and liquidity of the corporate bond market, investors are generally able to sell their bonds if they do not wish to hold them to maturity.
Who issues Corporate Bonds?
- U.S. and foreign industrial companies
- U.S. and foreign transportation companies
- U.S. and foreign financial services companies (banks, insurance and finance companies)
- Public utility companies
- Foreign governments
How do I choose a Corporate Bond?
There are several factors to consider when choosing a bond. One of them is safety of principal. A bond's credit rating is a good measuring stick for the safety of a bond. A bond rated AAA, AA, or A is subject to low credit risk. Another factor in choosing a bond is yield. You will most likely want to choose a bond with a high yield so that you will get a better return on your investment. However, a bond with a higher credit rating generally has a lower yield. Since you will presumably want safety of principal as well as a high yield, you might have to compromise and choose a bond with a good yield and considerable safety of principal but not the highest degree of both.
Another factor to consider is maturity. You will want to decide how long you wish to invest your money. The farther the maturity date is in the future, the more interest the bond will be likely to pay under normal market conditions. This is because the issuer will have use of the money it borrowed from you for a longer period of time.
