Why Savvy Investors Are Adding Corporate Bonds To Their Portfolios Now

Corporate bonds are debt securities issued by private and public corporations, in order to raise money – for example if a company is looking to expand. The security is the ability of the company to pay that money back – in this example, through the profit made from the expansion. The bonds are usually issued in multiples of $1,000 and have a maturity of at least one year. The exception to that is ‘callable bonds’ where the investor can reclaim the debt before the maturity date. Corporate bonds are tax-deductible for the issuer but unfortunately not the investor! The US Dollar corporate bond market is the biggest and the oldest. Foreign companies issuing bonds in this market are called ‘Yankees.’

Why choose corporate bonds?

Corporate bonds offer fixed, and therefore a reliable, income. Whatever is agreed when you make the purchase, that’s what you (or whoever you sell the bond to) will get.

Risks of corporate bonds

Corporate bonds are considered higher risk than government bonds because there’s always the chance the company could default. However this does mean the interest rate is higher, too. Junk bonds are bonds issued by companies with credit quality below investment grade – this is where investors should tread carefully. Again these kinds of bonds can also have correspondingly higher returns.

What to know about your bond (before you buy it)

Par value means the amount of the money the investor will get once the bond matures. The coupon rate is the amount of interest the bondholder will receive – it’s a percentage of the par value. The maturity date is the date when the money has to be returned. Sometimes a bond can be ‘called’ not only by the investor but by the company – this will be stated (and when it can be done) on the bond. It’s important to works out the yield on your investment (annual interest divided by the current value) rather than relying on the coupon rate, which can change along with the bond price when interest rates change. So if you sold the bond before maturity, you might not get the par value.