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.
Possible tax benefits
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.
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.
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:
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.