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.
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 corporation’s 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. 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.
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.
There are all types of corporate bond investors. Some include large financial institutions, while other investors are individual. Investors are usually attracted to corporate bonds because of the high yields, which often outperform maturity government bonds (link). However, this higher corporate bond yield is accompanied by a higher amount of risk. Corporate bond investors also have a variety of choices in terms of sectors and credit-quality characteristics. The public corporate bond market is also very large and liquid, which can be helpful for quickly selling bonds before it reaches maturity.
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 here to find out how to use a Mainstar Trust account to invest in a corporate bond.