20 Investments: Corporate Bond
  1. 20 Investments: Introduction
  2. 20 Investments: American Depository Receipt (ADR)
  3. 20 Investments: Annuity
  4. 20 Investments: Closed-End Investment Fund
  5. 20 Investments: Collectibles
  6. 20 Investments: Common Stock
  7. 20 Investments: Convertible Security
  8. 20 Investments: Corporate Bond
  9. 20 Investments: Futures Contract
  10. 20 Investments: Life Insurance
  11. 20 Investments: The Money Market
  12. 20 Investments: Mortgage-Backed Securities
  13. 20 Investments: Municipal Bonds
  14. 20 Investments: Mutual Funds
  15. 20 Investments: Options (Stocks)
  16. 20 Investments: Preferred Stock
  17. 20 Investments: Real Estate & Property
  18. 20 Investments: Real Estate Investment Trusts (REITs)
  19. 20 Investments: Treasuries
  20. 20 Investments: Unit Investment Trusts (UITs)
  21. 20 Investments: Zero-Coupon Securities
  22. 20 Investments: Conclusion

20 Investments: Corporate Bond

What Is It?
Similar to a mortgage with a bank, bonds are an issue by a borrower to a lender. When you buy a corporate bond, you are loaning your money to a corporation for a predetermined period of time (known as the maturity). In most cases, the bond's par value is $1,000. This is the face value of the bond and the amount the lender will be repaid once the bond matures.

Of course, you're not going to loan your money for free. The borrower must also pay you a premium, known as a "coupon", at a predetermined interest rate in exchange for using your money. These interest payments are usually made every six months until maturity is reached.

There are three important factors you need to consider before buying a bond. The first is the person issuing the bond. The second is the interest (or coupon) you will receive. The third is the maturity date, the day when the borrower must pay back the principal to the lender.

Objectives and Risks
Corporate bonds offer a slightly higher yield because they carry a higher default risk than government bonds. Corporate bonds are not the greatest for capital appreciation, but they do offer an excellent source of income, especially for retirees. Corporate bonds are also highly useful for tax-deferred retirement savings accounts, which allow you to avoid taxes on the semiannual interest payments.

The risks associated with corporate bonds depend entirely on the issuing company. Purchasing bonds from well-established and profitable companies is much less risky than purchasing bonds from firms in financial trouble. Bonds from extremely unstable companies are called junk bonds and are very risky because they have a high risk of default.

How to Buy or Sell It

Corporate bonds can be bought through a full service or discount broker, a commercial bank or other financial intermediaries. The best time to buy a corporate bond is when interest rates are relatively high. (To learn more, see the Bond Basics Tutorial.)


Strengths
  • Many corporate bonds offer a higher rate of return than government bonds, for only slightly more risk.
  • The risk of losing your principal is very low if you only buy bonds in well-established companies with a good track record. This may take a bit of research.
  • Weaknesses
  • Fixed interest payments are taxed at the same rate as income.
  • Corporate bonds offer little protection against inflation because the interest payments are usually a fixed amount until maturity.
  • Three Main Uses
  • Capital Appreciation
  • Income
  • Safe Investment
  • 20 Investments: Futures Contract

    1. 20 Investments: Introduction
    2. 20 Investments: American Depository Receipt (ADR)
    3. 20 Investments: Annuity
    4. 20 Investments: Closed-End Investment Fund
    5. 20 Investments: Collectibles
    6. 20 Investments: Common Stock
    7. 20 Investments: Convertible Security
    8. 20 Investments: Corporate Bond
    9. 20 Investments: Futures Contract
    10. 20 Investments: Life Insurance
    11. 20 Investments: The Money Market
    12. 20 Investments: Mortgage-Backed Securities
    13. 20 Investments: Municipal Bonds
    14. 20 Investments: Mutual Funds
    15. 20 Investments: Options (Stocks)
    16. 20 Investments: Preferred Stock
    17. 20 Investments: Real Estate & Property
    18. 20 Investments: Real Estate Investment Trusts (REITs)
    19. 20 Investments: Treasuries
    20. 20 Investments: Unit Investment Trusts (UITs)
    21. 20 Investments: Zero-Coupon Securities
    22. 20 Investments: Conclusion
    RELATED TERMS
    1. Bond

      A debt investment in which an investor loans money to an entity ...
    2. Discount Bond

      A bond that is issued for less than its par (or face) value, ...
    3. Bond Discount

      The amount by which the market price of a bond is lower than ...
    4. U.S. Savings Bonds

      A U.S. government savings bond that offers a fixed rate of interest ...
    5. Term To Maturity

      The remaining life of a financial instrument. In bonds, it is ...
    6. Premium Bond

      1) A bond that is trading above its par value. A bond will trade ...
    RELATED FAQS
    1. Which factors most influence fixed income securities?

      Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
    2. What forms of debt security are available for the average investor?

      Discover the various different types of debt securities, issued by government entities or corporations, that are available ... Read Answer >>
    3. Do long-term bonds have a greater interest rate risk than short-term bonds?

      The answer to this question lies in the fixed income nature of bonds and debentures, often referred to together simply as ... Read Answer >>
    4. What determines the price of a bond in the open market?

      Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
    5. Why is my bond worth less than face value?

      Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
    6. What are the key factors that will cause a bond to trade as a premium bond?

      Learn about the primary factor that can cause bonds to trade at a premium, including how national interest rates affect bond ... Read Answer >>

    You May Also Like

    Hot Definitions
    1. Goodwill

      An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
    2. Return On Invested Capital - ROIC

      A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
    3. Law Of Demand

      A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
    4. Cost Of Debt

      The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
    5. Yield Curve

      A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
    6. Stop-Limit Order

      An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
    Trading Center