What are Corporate Bonds?

Corporate bonds (also called “corporates”) are debt obligations, or IOUs, issued by privately- and publicly-owned corporations. When you buy a corporate bond, you essentially lend money to the entity that issued it. In return for the loan of your funds, the issuer agrees to pay you interest and to return the original loan amount – the face value or principal – when the bond matures or is called (the “maturity date” or “call date”). Unlike stocks, corporate bonds do not convey an ownership interest in the issuing corporation. Companies use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding their business.

Investors buy corporates for a variety of reasons:

  • Attractive yields.  Corporates usually offer higher yields than comparable-maturity government bonds. This higher yield is, however, generally accompanied by higher risks.
  • Periodic income.  Investors seeking steady income from their investments, while also preserving their principal, may include corporates in their fixed income portfolios.
  • Diversity.  Corporate bonds provide an opportunity to choose from a variety of sectors, structures, and credit-quality characteristics to address investment diversification objectives.
  • Liquidity.  Large and liquid sectors of the corporate bond market can provide relatively quick and easy marketability for investors who want to sell a bond before maturity.

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