What is a corporate bond?• It is a debt that corporations issue to raise money in order to expand its business. The company is to pay interest during the lifetime of the bond in addition to the money borrowed, to the holder.• Corporate bonds represent a promise to pay bondholders a fixed sum of money (called the bond’s principal, or par or face value) at a future maturity date, along with periodic payments of interest (called coupons).• An indenture is contract between an issuer of bonds and the bondholder stating the time period before repayment, amount of interest paid and the amount of money that is to be repaid.
Corporate Bonds vs. Common Stock Corporate Bonds Common Stock-Represents a creditor’s -Represents anclaim on the ownership claim on thecorporation corporation-Promised cash flows -Amount and timing of(coupons and principal) dividends may changeare stated in advance at any time-Mostly callable -Almost never callable(repayable on demand)
How do you buy a corporate bond?• You can buy corporate bonds from public utility companies, transportation companies, industrial corporations, financial service companies, and conglomerates (which includes a combination of major corporate businesses).• Most corporate bonds trade in the over-the-counter (OTC) market. This market does not exist in a central location. It is made up of bond dealers and brokers from around the country who trade debt securities over the phone or electronically. Market participants are increasingly using electronic transaction systems to assist in the trade execution process.
Advantages of Corporate Bonds• Bonds give higher interest rates compared to short- term investments.• Corporate bonds provide an opportunity to choose from a variety of sectors, structures and credit- quality characteristics to meet your investment objectives.• Corporate bonds are considered safer than common stocks, because in the corporate structure of a company, bondholders receive priority over stockholders in the event of a corporate bankruptcy.
Disadvantages of Corporate Bonds• Selling bonds before they’re due may result in a loss, a discount.• If the issuer of the bond declares bankruptcy, you may lose money.• The prices of bonds are affected by fluctuations in interest rates within the economy. Bond prices move inversely to interest rates; when interest rates rise, bond rates fall and vice versa.• When interest rates decline, making it more favorable for the issuer to refinance their debts. If this occurs, the investor would be forced to redeem their bond and replace it with a new one that potentially would have lower coupon rates. For an investor who is relying on this income for their lifestyle, this can be a substantial disadvantage.
Are corporate bonds doing well in this economy?• Corporate bonds are successful in our current economy. According to Bloomberg, corporate bonds are rallying for the fourth straight quarter, the longest streak since 2004, extending a record advance as 72 percent of companies beat analysts’ earnings expectations.
Are corporate bonds best for you?• People who want steady income from their investments, while preserving their principal, may include corporate bonds in their portfolios.• If you must sell a bond before maturity, in most instances you can do so easily and quickly because of the size and liquidity of the market.