Corporate bonds are popular among investors, typically offering lower risk and higher income than shares.
Corporate bonds are debt instruments issued by private and public corporations in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is usually applied to longer-term debt instruments, with maturity of at least one year.
Corporate bonds are considered to have higher risk than government bonds. As a result, interest rates are almost always higher on corporate bonds, even for companies with top-flight credit quality.
Corporate bonds are a form of debt financing. They can be a major source of capital for many businesses, along with equity, bank loans and lines of credit. Generally speaking, a company needs to have some consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate. If a company’s perceived credit quality is higher, it becomes easier to issue more debt at low rates. When corporations need a very short-term capital boost, they may sell commercial paper, which is very similar to a bond but typically matures in 270 days or less.
When an investor buys a corporate bond, he lends money to the company. Conversely, when an investor purchases stocks, he essentially buys a piece of the company. The value of stocks rises and falls with the value of the company allowing the investors to earn profits but also subjecting the investor to losses. With bonds, investors only earn interest rather than profits. If a company goes into bankruptcy, it pays its bondholders along with other creditors before its stockholders, making bonds arguably safer than stocks.
While some corporates bonds have redemption or call features that can affect the maturity date, most are loosely categorized into the following maturity ranges.
- Short-term notes ( with maturities of up to five years)
- Medium-term notes ( with maturities ranging between 5 to 12 years)
- Long-term bonds (with maturities greater than 12 years)
BENEFITS OF INVESTING IN CORPORATE BONDS:
Investors buy corporates for a variety of reasons.
- ATTRACTIVE YIELDS:
- Corporates usually offer higher yields than comparable-maturity government bonds or CD’s.
- This high-yield potential is, however, generally accompanied by higher risks.
- DEPENDABLE INCOME:
- People, who want steady income from their investments, while preserving their principal, may include corporates in their portfolios.
- Corporate bonds are evaluated and assigned a rating based on credit history and ability to repay obligations. The higher the rating the safer the investment as measured by the likelihood of repayment of principal and interest.
- Corporate bonds provide an opportunity to choose from a variety of sectors, structures and credit-quality characteristics to meet your investment objectives.
- One can sell a bond before maturity, and in most cases one can buy and sell bonds more quickly because of the size and liquidity of the market.