Corporate Bonds

Corporate bonds are those bonds that are offered or issued by a corporation. Many companies issue corporate bonds when they need to raise capital for investments or to fund other things. Offering additional stock in the corporation allows the company to get the capital that it needs and offers a good investment opportunity for consumers, but does often bring about difficulties. Another way to raise capital for needed expenditures is to sell bonds which is a much better option for many corporations than obtaining bank loans or selling stock.

Corporate bonds are offered by many different corporations and are a commonly chosen form of investment for many consumers. Most have a value of more than $1,000 and may have various different maturity dates. Corporate bonds typically offer a higher yield than municipal or government bonds because they carry a greater risk. Many investors however find that the risks are well worth the overall profit. You should understand that if you purchase corporate bonds and the company files bankruptcy then you have the opportunity to make a claim against on the company’s assets. A good benefit of being a bond holder as opposed to a stockholder is that the bond holder has precedence over stockholders should the corporation’s assets be liquidated. Many corporations issue mortgage bonds which are secured by real estate or equipment. Mortgage bonds are a bit safer than unsecured bonds and a much better choice for those who want to minimize risks.

There are a few things that you will need to keep in mind when purchasing corporate bonds. Understanding these bonds and how they work is critical in choosing wisely and protecting your investment. When it comes to purchasing corporate bonds be sure that you learn as much as possible about the bonds. Consider the maturity date, duration, rating, convertibility and other factors of the bond. Convertibility itself is very important and simply refers to how you can exchange the bond in the future. For instance, convertible corporate bonds can be exchanged for specific amounts of stock in the company. Before you purchase a bond check to see whether or not that bond is convertible. This will be outlined in the conversion terms along with the price, times and conditions under which you can exchange the bond for stock. Many convertible corporate bonds may also be callable which means that the company can literally force you to convert your corporate bonds into company stock. This is something else that you should check into before you purchase.

Whether or not a corporate bond is convertible can affect the bond performance in a variety of ways. Understand that convertible bonds typically have fairly lower interest rates than those that do not convert. This is because convertible bonds not only accrue interest but also increase in price as the price of stocks increase. In essence, convertible bonds offer a bit of both worlds. They have the advantages of both corporate bonds and company stocks. They will earn interest at all times and when stock prices increase their value will increase as well. They can help to offer a bit of risk protection against stock price decreases and because they are often sold at premiums over stock prices, they can earn their premiums back in just a couple of years after their initial purchase which is a major advantage to many investors. If however your convertible bonds are also callable, yield may cease. Be sure that you research thoroughly before purchasing corporate bonds to ensure whether or not they are callable and/or convertible as well as other factors that will help you in your decision to purchase from a specific corporation.

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