Corporate Bonds

Corporate bonds represent obligations of a company (the “issuer”) to pay bondholders periodic interest, typically at a fixed rate (the “coupon”), and to repay the amount of the loan (the “principal”) at a specified time in the future (the “maturity date”).

Most corporate bonds are offered in $1,000 increments, pay interest semi-annually and are available in maturities ranging from one to 40 years.

Credit Quality Ratings of corporate bonds

Credit risk is a meaningful issue in the corporate bond market, particularly during a slowing economy, which can be magnified by lower-than-expected earnings reports, as occurred during 2000 and 2001.

Corporate bonds are assigned credit quality ratings by several ratings agencies—most notably Moody’s and Standard & Poor’s (S&P)—based on a number of factors, including a company’s overall financial condition as well as the industry the issuer represents.

Types of corporate bonds - Investment Grade vs. High Yield Bonds

Credit ratings fall into two categories: investment grade and non-investment grade, also called high yield.

Investment grade corporate bonds generally provide the highest likelihood of payment of principal and interest and are the least likely to default. These high quality bonds typically offer higher yields than comparable-maturity fixed income securities, making them an attractive income source for more conservative investors.

High yield corporate bonds can provide substantial current income to investors willing to assume greater credit risk. In fact, high yield bonds typically offer the highest yields of any comparable-maturity fixed income security.

Those who cannot afford to risk any principal should never invest in high yield bonds. However, investing a portion of your assets in high yield bonds, in addition to equities, can provide an aggressive component to your portfolio, while also providing income.

Callable Corporate Securities

Many corporate bonds are issued with call features, enabling a company to call and retire a bond at specific dates and prices prior to maturity. To compensate for this potential early redemption, callable corporate bonds typically offer bondholders higher yields than noncallable bonds, a call protection period and in some cases, a call premium.

To learn about Corporate Bonds in-depth

There is a great website we know of, formatted much like this one, that covers everything there is to know about Corporate Bonds. Naturally, we thought we should post a link to it from here: Corporate Bonds Information (Information on Corporate bonds and notes. Investing strategies with new tools.)