Corporate BondsCorporate bonds are a way for corporations to raise cash, usually when a company wants to raise large sums of money like ten million or a hundred million dollars. A bond is basically a loan. But rather than go to the bank and ask for a single ten million dollar loan, a corporation will slice up the loan into $1,000 increments called bonds. They issue the bonds in individual slices to lenders, who are investors that purchase the bonds. Investors are paid interest semi-annually or annually in exchange for lending the money. So when you buy a bond, you're essentially playing the role of a banker. Corporate bonds are more risky than government bonds. That is, there is a higher risk of default on the part of the bond issuer. The corporation may go bankrupt, or they may not have enough cash on hand to make interest payments when they're due. Every investment has risks and bonds are no exception. Since these bonds are more risky than municipal or treasury bonds, they pay higher interest rates on average. The rule of thumb is that higher risk comes with the benefit of higher interest rates. Companies will pay higher interest rates in order to entice investors to assume that risk. The amount of interest paid on the bond relative to its face value is called the coupon or coupon rate. So, if a bond has a face value of $1,000 and the coupon is $50, the interest rate (or coupon rate) is $50/$1,000 * 100 = 5%. When purchasing bonds, its important to know the risk associated with the bond issuer. You can find this out by checking their credit rating. If a company has a good credit rating, this means you can reasonably expect them to make their interest payments and to pay back their principle at maturity when you redeem your bonds. When bonds have been issued by a company with a good credit rating, they are called investment grade bonds.
Remember, more risk means higher interest rates. So companies that issue bonds which don't have such a great credit rating pay higher interest rates. These types of bonds are called high yield or junk bonds, and the interest rates can often be substantially higher.
When checking bond prices, you will see the yield quoted along with the interest rate or coupon rate. If a bond was issued by a company paying 4% interest and the face value is $1,000, the coupon pays $40 per year. That's a fixed number. So even if the bond is trading on secondary markets for $1,100, the coupon is still $40. But what is the actual interest you would receive if you paid $1,100 to buy that bond? It would be: $40/$1100 * 100 = 3.64% This is the yield for that particular bond. There are several corporate bond indexes, including the Barclays Corporate bond index and the Dow Jones Corporate bond index. One of the best ways to invest in bonds is to invest in a mutual fund or exchange traded fund that buys bonds. Below you'll find two links to corporate bond funds. You will see that these funds hold bonds issued by JP Morgan Chase, AT&T, Citigroup, and Dow Chemical among others. Note that the long term fund is mixed (not all corporate bonds).
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