What Are Corporate Bonds?

Corporate bonds are debt securities issued by a corporation in order to raise money to grow the business, pay bills, make 𝄹capꦺital improvements, make acquisitions, and for other business needs.

Bonds are sold to investors and the company gets the capital it needs and in return, the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate. When the bond expires, or "reaches maturity," the payments cease and the original investment is returned.

The backing for the bond is generally the ability of the company to repay, which depends on its prospects for future revenues and profitability. In some cases, the company's physical assets may be used as 澳洲幸运5开奖号码历史查询:collateral.

Understanding Corporate Bonds

In the investment hierarchy, high-quality corporate bonds are considered a relatively sꦜafe and conservative inv⛎estment. Investors building balanced portfolios often add bonds in order to offset riskier investments such as growth stocks.

Over a lifetime, these investors tend to add more bonds and fewer risꦛky investments in order to safeguard their accumulated capital. Retirees often inve꧋st a larger portion of their assets in bonds in order to establish a reliable income supplement.

In general, corporate bonds are considered to have a higher risk than U.S. 澳洲幸运5开奖号码历史查询:government bonds. As a result, interest rates are almost always higher on corporate bonds, even for companies with top-flight 澳洲幸运5开奖号码历史查询:credit quality. The difference between the yields on highly-rated corporate bonds and U.S. Treasuries is called the 澳洲幸运5开奖号码历史查询:credit spread.

Corporate Bond Ratings

Before being issued to investors, bonds are reviewed for the creditworthiness of the issuer by one or more of 澳洲幸运5开奖号码历史查询:three U.S. rating agencies: Standard & Poor's Global Ratings, Moody's Investor Services, and Fitch Ratings.

Each has its own ranking system, but the highest-rated bonds are commonly referred to as "Triple-A" rated bonds. The lowest-rated corporate bonds are called high-yield bonds due to the greater interest rate applied to compensate for their higher risk. These are also known as 澳洲幸运5开奖号码历史查询:"junk" bonds.

Bond ratings are vital to alerting investors to the quality and stability of the bond in question. ♉These ratings consequently greatly influence interest rates, investmentꦡ appetite, and bond pricing.

Companies with solvency problems, those trying to avoid bankruptcy, and those in reorganization might also offer 澳洲幸运5开奖号码历史查询:income bonds, usually at an above-average rate. Income bonds can raise money for the struggling company and are not required to pay coup🔥ons or dividend payments.

How Corporate Bonds Are Sold

Corporate bonds are issued in blocks of $1,000 in face or par value. Almost all have a standard 澳洲幸运5开奖号码历史查询:coupon payment structure. Typicall⭕y a corporate issuer will enlist t💜he help of an investment bank to underwrite and market the bond offering to investors.

The investor receives regular interest payments from the issuer until the bond matures𒉰. At that point, the investor reclaims the face value of the bond. The bonds may have a fixed in⭕terest rate or a rate that floats according to the movements of a particular economic indicator.

Corporate bonds sometimes have 澳洲幸运5开奖号码历史查询:call provisions to allow for early prepayment if prevailing interest rates change so dramatically that the 🔥company deems it can do better by issuing a new bond.

Investors may also opt to sell bonds before they mature. If a bond is sold, the owner 𒀰gets less than face value. The amount it is worth is determined primarily by the number of payments that still are due before the bond mature𓂃s.

Investors may also gain access to corporate bonds by investing💞 in any number of bond-focused mutuཧal funds or ETFs.

Why Corporations Sell Bonds

Corporate bonds are a form of 澳洲幸运5开奖号码历史查询:debt financing. They are a major source of capital for many businesses, along with equity, bank loans, and lines of credit. They often⛎ are issued to provide the ready ca🌳sh for a particular project the company wants to undertake.

Debt financing is sometimes preferable to issuing stock (equity financ🌼ing) because it is typically cheaper for the borrowing firm and does not entail giving up any ownership stake or control in the company.

Generally speaking, a company needs to have consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate. If a company's perceived credit quality is higher, it can issue more debt at lower rates.

When a corporation needs a very 𝐆short-term capital boost, it may sell commercial paper, which is similar to a bond but typically matures in 270 days or less.

Corporate Bonds vs. Stocks

An investor who buys a corpo🎶rate bond is lending money to the company. An investor who buys stock is buying an ownership share of the 𝐆company.

The value of a stock rises and falls, and the investor's stake rises or falls with it. The investor may make money by selling the stock when it reaches a higher price, by collecting dividends paid by the company, or both.

By investing in bonds, an investor is paid in interest rather than profits. The original investment can only be at risk if the company collapses. One important difference is that even a bankrupt company must pay its bondholders and other creditors first. Sꦏtock owners may be reimbursed for their lo🦹sses only after all of those debts are paid in full.

Companies may also issue 澳洲幸运5开奖号码历史查询:convertible bonds♒, which are abl🐬e to be turned into shares of the company if certain conditions are met.

The Bottom Line

Companies need money to run their businesses. Even if they gene🌱rate enough money through their core operations, it can be financially prudent to raise outside money. Companies generally have two options of doing tꦫhis: equity financing and debt financing.

Equity financing is the issuance of stocks an🎐d debt financing includes the issuance of bonds.🐭 Corporate bonds allow companies to raise capital without giving up ownership and to operate more freely.