Understanding Corporate Bond

Bonds are the borrower’s issue to a lender most likely to a mortgage with a bank. If a corporate bond is purchased, it basically means that you are making a loan to a corporation in a fixed period of time, commonly known as “maturity”.

Usually, the bond’s par value is $1,000. It represents the face value of the bond, and the specific amount the lender will be repaid after the bond reaches maturity.  

In addition, you’re not going to loan your money for free. The borrower is responsible for paying you a premium, which is known as “coupon”, at a fixed interest rate in exchange for the use of your money. Typically, these interest payments are done every six months once the bond matures.

Buying a bond considers three types of important factors. First, the person who is issuing the bond. Second, the interest or “coupon” you’ll about to receive. Third, is the maturity date, the day when the borrower is responsible to repay the principal to the lender.

Corporate bonds Objectives and Risks 

A higher yield is offered in corporate bonds as they bring a higher default risk compared to government bonds. For capital appreciation, corporate bonds are not the best of all, however, it offers a great source of income particularly for retirees. Corporate bonds are beneficial for tax-deferred retirement savings accounts as it able to avoid taxes on the semiannual interest payments.

The only risk in a corporate bond is the issuing company alone. It’s safer if you’ll be purchasing bonds from a well-established at the same time profitable companies, rather than purchasing bonds from companies in financial trouble. Bonds from unsteady companies are known as “junk bonds” which are very risky because it involves a high risk of default.  

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