Corporate Bonds

Corporate bonds are similar to an IOU: a corporation borrows money for its operations at a contracted interest rate and for a specified period by issuing a bond. The company is obligated to pay the interest to its bond holders and must repay the borrowed amount of the bonds at the end of the bond term. Bonds are created when companies sell bonds through the public securities markets just as they sell stock. A company has some flexibility as to how much debt it can issue and what interest rate it will pay, although it must make the bond attractive enough to attract investors.

Because it is a fixed-income investment, a bond generally has less risk and lower returns than a stock. Bonds are also less risky investments than stocks because the interest-bearing security is "senior" to the company's stock and therefore must legally be paid before funds are made available to stockholders.

Corporate bonds are also called "interest-bearing bonds" or "finance bonds" and normally carry higher interest rates than Treasury Bonds (issued by the US Government) or Municipal Bonds (issued by states, counties or cities). The higher interest rate is required because there is a higher risk that the company could default (not pay) its bond IOU. Some bond categories offer a higher or lower rate of return in exchange for greater risk or lesser risk.

• High-yield bonds are also known as junk bonds and are issued by companies whose credit quality is below investment grade. High-yield bonds, for example, have historical returns on par with stocks but have a greater chance of defaulting.

• Convertible bonds are bonds with a twist. They are similar to traditional interest-bearing bonds but they can be converted into stock if certain provisions are met. This can be a valuable option to you as an investor.

• Zero-coupon bonds . These bonds will not pay any interest until the maturity date, when you receive all of your principal back plus interest for the entire period the money was borrowed.

When investing in bonds, consider what other assets you may have in your portfolio. As a fixed income investment, bonds should be a part of any balanced portfolio. You can compare one bond issue to another or to other investments by calculating its yield.

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