What are Corporate Bonds?
Corporate Bonds are debt securities that are issued by all sizes of
Corporations to raise capital to either continue operations, expand
operations, or to raise capital for other purposes. Corporation would
rather issue Corporate Bonds than borrow from a Bank because they pay
lower interest than they would pay a bank.
You can buy these bonds when issued from most large brokerage firms, or
in the aftermarket on most of the securities exchanges. When you buy a
Corporate Bond you are interested mostly in the yield you will get, not
the coupon yield. The reason for this is that Corporate Bonds pay
dividends that are fixed, just like most other Bonds. So if the price of
the bonds are less than when issued, called Par Value, your yield will
be higher. Conversely, if the Bond price is higher than Par Value, the
yield will be lower than when issued. So the two components of Corporate
Bonds that will result in your yield are the price and dividend.
Corporate Bonds generally yield more then C-D’s but also entail more
risk and are not guaranteed against loss by S.I.P.C.
Bonds are rated for their solvency and ability to pay
their dividends to bondholders. The rating agency is called Moody’s. The
best rating is “AAA”, and the lowest is “C”. The lower the rating, the
higher the yield will be, since investors want to be compensated for the
added risk. Any Corporate Bond that is not rated is called a “Junk
Bond”. They pay the highest yield, but can be risky.
So compare current Corporate Bond yields and consult a specialist in
Corporate Bonds before making a purchase.
The easiest way to purchase a Corporate Bond is to buy a Corporate Bond
Mutual Fund. In addition to having a professional management team
to select the bonds, you can get a check sent to you every month in the
event you need monthly income. Since there are sometimes 100’s of bonds
in the mutual fund, the risk is spread out more than buying a single
issue. And with Corporate Bond funds, they are easy to sell. You can buy
funds that have no sales charges directly through a no-load fund family,
or through a financial advisor who will offer you guidance but will
entail sales charges.
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