In today’s blog would like to briefly look at Corporate Bonds and High Yield Bonds, what they are and the basics of investing with them. For anyone interested in investing in corporate bonds, this should be some good information to get you started. Enjoy.
What are Corporate Bonds exactly?
Corporate bonds, which are also known as simply corporates, are in effect a debt obligation that is issued by either a private or public corporation. You can think of them like an IOU issued by a company. In most cases corporate bonds are issued in either multiples of $1000 or $5000, and the funds that companies raise when they sell bonds to the public are used for a wide variety of different purposes. In most cases the funds are used to expand the business somehow, from building larger facilities to purchasing new equipment and so forth.
When an investor purchases a bond, they are basically lending money to the company or organization that issued the bond and, in return, that company or organization promises to pay that money back (the principle) on a specific date (the maturity date).
Until the maturity date arrives, the company will also pay the investor a specific rate of interest, and usually pay it semiannually. Two very important things to note when you consider investing in bonds is that;
2) Unlike investing in stocks, you do not have an ownership interest in the company or corporation when you purchase bonds.
High Yield Bonds
When it comes to issuing corporate bonds, there are a number of credit rating agencies that rate the companies and organizations who wish to do so. Those include Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings.
When these credit rating agencies rate companies and find them to be excellent, they qualify for what’s called an “investment-grade” rating. That’s a good thing because it means that the chance the company will default and not pay back the bondholders is very low.
On the other hand, if a company doesn’t qualify for an investment-grade rating (because they have a higher chance of default) these companies are forced to pay a higher interest rate in order to attract investors. The higher interest rate compensates investors for the fact that they are taking on more risk by purchasing their bonds.
You’ll find many organizations issuing high-yield bonds, even US corporations, banks and oftentimes foreign governments as well.
Be sure to come back soon as we’ll be featuring more information about Corporate Bonds in a future blog articles.