Corporate bond is the bond issued by companies to access capital. Unlike selling stocks, issuing corporate bonds will not dilute ownership and it can save the companies from the problem of negotiating with a traditional lender. Just like other bonds, companies that issue the bonds promise investors that they will pay the face value and the interest in time. If the company goes broke, holders have the right to claim the company’s cash and assets.
Some of the corporate bonds are traded publicly and some of them are traded over-the-counter (OTC). The latter one is very important because it can offer great liquidity and help investors activate their bond portfolio. After selling out the bonds, the companies can use the gained money in different ways, including research and development (R&D), refinancing, mergers and acquisitions (M&A), and funding stock buybacks. Some companies will choose to issue callable or redeemable bond to maximize their profit. Issuing callable corporate bonds allows them to redeem their bonds if the interest rate goes down thus they can reissue the bonds with fewer cost. Likewise, companies will choose to issue putable bond which allows investors to sell the bonds to the issuers before maturity date.
Corporate bonds are graded by rating agencies based on their financial performance, debt, and growth potential. If their rate is above BBB, they are graded as investment grade; if their rate is below BBB, they are graded as junk bonds. For those highly-rated corporate bonds, their risk are much lower and can guarantee investors a regular and steady income.
- Bond holders rank higher in repayment order. If the company goes bankrupted, bond holders will get paid before shareholders.
- Investors can get a regular and certain investment return.
- Investors can have an overview of bond’s principal before maturity date since there are many active dealers in market.
- Corporate bonds have greater return compared with government bonds.
- Some of the corporate bonds can be converted into stock.
- Corporate bonds will not add diversity to investors’ portfolio if they are already a shareholder of the company.
- Corporate bonds do not have capital growth under most circumstances but only to ensure that investors get their interest payments in time.
- It is sometimes difficult to sell or exchange corporate bonds in secondary markets without reducing the price greatly.