What Are Corporate Bonds?

A corporate bond is a loan from an investor to a business for a fixed period of time.

Issued by a corporation they are used to expand business. The bond is repaid at “maturity” (the determined period of time for the bond) as well as an interest return for the investor.

Corporate bonds are one of the most common in the bond market and provide a decent return on investment with a lower risk than other investments like equities.

A corporate bond is made up of 2 values:

• Par Value: The original amount of the bond. This is what an investor will pay a corporation for the bond.
• Coupon or Premium: A coupon is a pre-determined interest rate that is paid to an investor in exchange for the original investment. These interest payments are usually paid semi-annually or when the bond matures.

How To Buy Corporate Bonds?

After considering your option to buy a corporate bond and are confident in the corporation issuing the bond, the coupon rate and the maturity date the next step is how and where to buy a corporate bond.

Corporate bonds can be purchased in two forms. Firstly from the initial corporation offering and can be at times difficult for small investors without the help of a banking institution, prices are fixed for all investors, this is known as the offering price.

The secondary market involves buying from investors who have had to liquidate their bonds prior to maturity. Buying secondary bonds can be over the phone or through a broker

Bonds are available on major exchange markets like the NASDAQ and electronic communications networks however most bonds are traded through dealers, brokers and over the counter markets.

Benefits - Advantages of Corporate Bonds

• A higher rate ROI/yield than standard bank interest rates
• Lower risk if purchasing bonds from well established, proven companies
• Provide a fixed stream of income in the form of coupon payments
• Bond holders usually get paid before stock holders
• You can sell your bonds if liquidity is an issue. Bonds sell on the secondary market.

Weaknesses - Disadvantages of Corporate Bonds

• Interest payments are often taxed as income
• In the current time of recession, corporations are going bankrupt, making choosing a corporate bond very strategic
• Directly affected by interest rates and inflation
• Corporate bonds have greater risk than Government bonds