Corporate Bonds

Corporate bonds are a flexible and traditional option that mimics the act of lending money to a corporation with the promise of being paid back at maturity with interest. Investing in corporate bonds is an attractive option to many because of the potential for higher yields—but that comes with higher risk.

  • Traditional strategy

    Stick with a tried-and-true favorite with corporate bonds.
  • Possible tax benefits

    In an SDIRA, bonds may offer unique tax benefits.
  • Flexible investment

    The many types offer a truly personalized experience.

What is a corporate bond?

Corporate bonds are bonds issued by corporations and sold to investors to fund capital improvements, debt refinancing, expansions, or acquisitions.

The range of corporate bonds issued allows investors to customize a bond portfolio around their specific needs.

How do corporate bonds work?
Corporate bonds are a form of debt financing where debt obligations (IOUs) are issued by corporations and sold to investors. Corporations use this money for a variety of purposes like expanding a business, capital improvements, new facilities, etc.

Unlike stocks, corporate bonds do not represent ownership in the corporation, but rather think about corporate bonds as investors lending the corporation money. The company promises to pay back this loan at a specified date, referred to as the maturity date. During the term length, the corporation pays the investors interest until the loan matures.

Corporate bond interest is usually paid semiannually, excluding zero-coupon bonds where all interest is paid on the maturity date. Step-coupon rates change at predetermined intervals, usually increasing with time, but may start with a lower initial interest rate.

Navigation Tip:

Bondholders are not allowed to vote in corporate matters and are not entitled to dividends, but they are among the first to be paid in the event of liquidation.

Types of corporate bonds

The types of corporate bonds list is long and complicated. Each type varies greatly in terms of structure and associated risk. A few of the most common types include:

Secured bonds
Debenture bonds
Mortgage bond
Convertible bonds
Collateral trust bonds
Guaranteed bonds
Equipment trust certificates
High-yield corporate bonds

Corporate bonds pros and cons

Pros Cons
Yields that outperform government bonds Higher amount of event risk
Variety of sector choices Many must be purchased OTC
Variety of credit-quality characteristics Higher credit risk
Large corporate bond market May be tricky to resell

How to buy corporate bonds

Investors are encouraged to do adequate research or contact a broker/financial advisor, attorney or CPA, to determine if corporate bonds are an appropriate investment.

Once you have determined that a corporate bond is suitable for you, it can be purchased with your Self-Directed IRA or other retirement account at Mainstar Trust. Click below to discover how to use a Mainstar Trust account to invest in corporate bonds.