Bonds are a debt obligation no matter if it’s a corporate bond or a government bond. Corporate bonds are issued when businesses are raising money, outside of the equity market. The money raised can be used for mergers and acquisitions, research and development, or anything else.
When buying a corporate bond, typically a company will pay interest payments on a set timeline and repay the principal amount of the bond at maturity.
These are bought and sold on the first and secondary markets. Mainly sold on the secondary markets because of the durations and other changes to one’s life.
Corporate bonds compared to Goverment bonds:
Corporate bonds have higher risk and typically pay a higher interest rate. Depending on the corporation the offered interest rate may be much higher or lower compared to others based on the risk.
Government bonds are looked at as safe with low volatility and low interest rates. Major government’s bonds are rated near the top of scale referring to low risk.
Grade of Bonds
Bonds do have risk and are rated by Moody’s, Fitch, and Standard & Poor’s.
The risk of bonds is the chance of default, the corporations and governments are graded on the assumed risk. There are multiple different grades of bonds which break into two sectors investment-grade and non-investment-grade.
Investment-grade are considered bonds rate Baa3/BBB- or better. These are bonds that are safer than non-investment-grade.
Non-investment-grade are also considered high-yield or junk bonds, everything below investment-grade.
Duration
The duration of corporate bonds can typically range from 1 year to 30 years. There are durations that could be much longer but be sure to read the end date.
Corporate bonds can be used to add diversification to portfolios, weighing risk and return. Not all investments are for everybody, talking to a financial advisor or CPA to understand your goals and be able to guide you.
Related articles: