Corporate Bonds

The term corporate bond refers to a type of bond that are issued by companies to raise money in order to expand their business operations. When you buy a corporate bond, you are essentially lending money to a company. The company promises to return your money, also known as the principal, at a specified date in the future, knows as the maturity date. In return for this money you are lending the company, the company agrees to pay you a specified interest rate. Corporate bonds are usually a longer term security with maturity dates falling at least a year after their issue date. Bonds that are issued by corporations that have a maturity date less then one year are often referred to as commercial paper.

Corporate bonds generally pay an interest rate which is known as the coupon. This coupon or interest rate is usually taxible. Corporate bonds can have a zero interest rate with a high redemption value upon maturity. Please be sure to research and understand the type of bond you are purchasing.

When you compare a corporate bond to a government bond, corporate bonds generally have a higher risk of default. Companies can default on bond payments in times of economic downturns. For this reason, corporate bond holders are compensated for this risk by receiving a higher yield than government bonds. You should not confuse buying a corporate bond with buying equity in a company. While a corporate bonds gives you an IOU from the company, it does not give you any ownership in the company like when you purchase shares of a companies stock.

There are many reasons investors buy corporate bonds. Many of these investments offer attractive yields, usually much higher then government bonds or CDs. Corporate bonds can be a dependable stream of income. People wishing to diversify their portfolios to include an income stream buy bonds. Corporate bonds are assigned a rating based on the credit history of the company issuing the bonds. The higher the rating, the safer the investment is considered.

Corporate bonds are considered less risky than buying shares of a company stock. Since a company must pay off all its debt, including bonds, before it handles any obligations to stockholders.

Many corporate bonds carry a feature known as a call provision. This means that the issuing company can pay back the principal amount to the bond holders before the bond matures. Other types of corporate bonds include convertible bonds. This type of bond carries a provision where the bond can be converted into shares of the companies common stock. Convertible bonds can be more attractive than bonds with no convertible provision, depending on the price of the underlying stock.

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