Corporate Bonds

Description

This article is from the Investing Articles: Bonds series.

Corporate Bonds

What are corporate bonds?

Corporate bonds are debt obligations issued by corporations as an alternative to issuing stock when raising capital. The corporation promises to repay the loan at a specified future date and makes semi-annual interest payments to the investor at a fixed rate. Because bonds are senior to stock, interest and principal are paid to bondholders before dividends are paid to stockholders.

Benefits of corporate bonds

Whether you're purchasing corporate bonds to diversify your portfolio or buying them because your investment strategy calls for higher returns than Treasuries offer, you can take advantage of:

Flexibility

Investors have the option to select from a wide range of corporate bonds -- ranging from specific industries to particular coupons, maturities and ratings.

Dependable Income

Corporate bonds pay interest semi-annually until maturity or until they are called. Investors / owners will know when to expect your payments and how much they'll be.

Diversification

Many people buy bonds to diversify their portfolios. Because there are so many different corporate bonds, you can structure your portfolio according to your particular investment strategy. Of course, your mix of bonds and stock will depend on your investment objectives.

Liquidity

If you need cash you can sell your bonds any time prior to maturity in the secondary market. Some bonds trade more actively than others and may be easier to sell. Because bond prices and interest rates move in opposite directions, you may receive more or less than your original investment if you sell. Of course, if you hold your corporate bond until maturity, the issuer promises to pay back the full face value.

High Returns

Corporate bonds offer higher yields than Treasury bonds of similar maturities and may be appropriate for investors who are willing to trade off some security for potentially higher returns. Usually, bonds with higher yields have lower credit ratings. And some bonds are callable, which limits your ability to lock in the high yield for the full term.