What is a Corporate Bond?
Corporate bonds are debt instruments that are issued by corporations considered to be publicly held. Generally, a corporate bond is issued as a means of raising necessary funds to allow the company to engage in an expansion project, or to address other corporate projects that are anticipated to increase the profitability of the company over the long term. The expectation is that the corporation will begin to benefit from the project before the bond issue matures, allowing the company to comfortably honor both the face value of the bond and any accrued interest due to the bondholders.
In most areas of the world, a corporate bond is likely to pay a higher rate of interest than bonds issued by local or national governments. However, it is important for the investor to note that the purchase of a corporate bond usually does not allow for the interest generated by the bond to be tax exempt. Many examples of the corporate bond include terms and conditions that allow for the issuance of interest payments on an annual or semiannual basis, which must be accounted for on annual tax returns.
Purchasing a corporate bond is usually accomplished through investment brokers. However, it is also possible to acquire a bond issue from a secondary market as well. In general, choosing to purchase the corporate bond through a broker will mean paying the current par value associated with the bond. When purchasing the corporate bond from a secondary market, the price may be higher or lower than the par value.
A third option is to invest in a mutual fund that focuses on the purchase of corporate bonds as part of the fund strategy. Investors who prefer to leave most of the investigation into bond issues with the managers of the mutual fund often favor this approach. Assuming that the corporate bond or bonds selected for inclusion in the mutual fund are performing well, an investor will realize a significant return.
The corporate bond can be a short term or a long term bond issue. There are examples of a corporate bond that matures from one to five years, while other examples may be structured to mature anywhere from thirty to forty years from the date of issue. Various rates of maturation will present advantages to the investor, depending on what the investor hopes to gain from the purchase of the bond.
It is important to look at how the company is doing and why they are issuing the corporate bonds. If the reason is to raise funds for an upcoming project, you really need to understand if the project sounds plausible or will the venture seem risky.
For example, buying Bank of America corporate bond investments when they were thinking of buying Countrywide to me was not a wise choice because Countrywide was laden in so much debt that it would take a while for Bank of America to recover.
To this day, I think that it was a mistake that the company bought out Countrywide, but I bet their corporate bond prices were down while the corporate bond rates were higher than average because of the risk.
Corporate bond investments should be made with caution. Looking at the corporate bond prospectus will offer you the information you need in order to decide whether to buy corporate bonds or not.
A high yield corporate bond offers a better return on investment, but also raise the risk as well. If a company goes bankrupt, the bond holders in that company are supposed to get their payment before the stockholders do, but in the case of General Motors, the bond holders got twenty cents on the dollar, while the unions took the lion’s share of the money.
Although this is atypical of what happens when a company goes bankrupt you really need to keep a close eye on the financials of the company. If they are highly unionized in their industry, it adds another layer of risk that may make the investment a bad choice.
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