Companies issue bonds to raise money for expanding their business then the investors buy bonds and receive regular interest payments (coupon) from the issuing company throughout the pre-determined lifetime of the bonds. Q: What are Corporate Bonds?
A corporate bond is a debt security that is issued by public and private corporation to raise capital and sell to an investor. Companies want to raise capital in order to expand their business.
The issuer of bonds gets the money that is required for raising funds and interest should be paid to the lender.
Q: How do corporate bonds work?
Firstly, the companies issue bonds to raise money for expanding their business then the investors buy bonds and receive regular interest payments (coupon) from the issuing company throughout the pre-determined lifetime of the bonds.
Bondholders can pay either a fixed or floating rate of interest.
A fixed-rate of interest means that the lender receives the same amount of interest every year until the bond matures.
A floating rate of interest means the amount received by the investor is subject to change from one payment period to the next.
Q: How to buy corporate bonds?
Buying bonds is just as easy as investing in the equity market. Primary market purchases may be made from brokerage firms, banks, bond traders, and brokers, all of which take a commission for facilitating the sale.
Some corporate bonds are traded on the over-the-counter (OTC) market and offer good liquidity—the ability to quickly and easily sell the bond for ready cash.
Q: What are the pros of corporate bonds?
- They have higher growth potential than government bonds.
- They are less vulnerable to inflation and interest rate increases more than government bonds due to generally shorter periods to redemption.
- They are a very useful diversifier for low-medium, medium and medium-high risk portfolios.
- They are less risky than equities or property.
Q: What are the cons of corporate bonds?
- They may fall in value if the interest rate or inflation expectations rise.
- They may fall in value in the event of a severe economic downturn.
- They are unlikely to match long-run returns on equities.