Corporate bonds (also called corporates) are basically debt instruments. Companies issue corporate bonds in order to raise money for projects they cannot afford to instigate on their net income alone. When you buy a corporate bond you will effectively be lending money to the company issuing the bond.
Benefits of Corporate Bonds
Corporate bonds offer investors several financial benefits. The main advantage is a steady income throughout the term of the investment through the payment of interest. This will be set at a pre-agreed rate (based on interest rates) and most bonds issue payments semi-annually.
Each corporate bond also has a specified maturity date. On this date the company promises to pay you back the money you initially invested. By investing money into corporate bonds you can make your money work hard for you. Not only will you get your original investment back, but your money will be earning you some profitable interest in the meantime.
Secured and Unsecured Bonds
You can choose between secured and unsecured corporate bonds. Secured bonds are backed up by specific company assets. What this basically means is that if the company fails to return your principal (the amount you invested) on the maturity date or pay the interest owed to you then you can seize the promised assets. This is a secure way of investing money, but the returns may not be as profitable as on unsecured bonds. Unsecured bonds are riskier as they are merely promises to pay interest and principal. If the company goes bust or experiences severe cash flow problems and does not honour the bond you could lose your money. Unsecured bonds are called debentures and although they are riskier they often offer much high potential returns.
Additional Features of Corporate Bond
Corporate bonds can have some additional features so it is important to research them thoroughly before you invest. For example some may give the company the right to buy back your bonds before the maturity date. Other bonds may offer you the option to turn your corporate bonds into company stock, which could be very profitable if the markets are running in your favour.
How to Invest in Corporates
You can invest in these bonds through a broker and many mutual fund options will contain a number of corporate bond investments. Corporate bonds are typically issued in denominations of 1,000, 5,000 and 10,000. They are offered in both short and long-term maturities. You can sell your bonds on the open market before they mature. If interest prices have fallen since your initial investment then you could make a good profit.
Corporate bonds can be risky as if the company issuing the bonds goes bankrupt you will lose your money. Also if interest rates rise you may lose out if you have to sell on the open market. However as these bonds are riskier than government bonds they can pay much higher returns. If you invest well and choose companies with strong credit ratings then you should be minimal risk from losing your investment.
by: Gareth Hoyle
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Corporate bonds can offer guaranteed high interest return opportunities for investors. There are a number of diverse options including short term and long term maturities. Corporate bonds can provide a solid investment choice for a diverse and profitable portfolio.