Corporate Bond Investing
Corporate Bond Investing. What are the advantages and disadvantages of investing in corporate bonds? A thorough analysis of the benefits and risks involved in corporate bonds.
Corporate bonds are investments into bonds issued by businesses. Unlike municipal bonds, corporate bonds generally require a more active investment approach should circumstances change. Corporate bonds are sometimes actively traded, as investors are not locked in until the maturity of the bond.
Interest payments are usually semi-annual. If you hold tax-deferred retirement savings accounts, corporate bonds are one of the ways you can avoid taxes on the interest payments.
Zero Coupon Bonds
Some corporate bonds are issued as zero coupon bonds. These bonds are issued at a significant discount from par (face value), but make no periodic coupon interest payments and will mature at par.
Benefits of Corporate Bonds
What are the benefits of corporate bonds?
Corporate bonds offer a steady stream of income. As there is a higher credit risk associated with corporate bonds, yields on corporate bonds are generally higher than those on municipal bonds.
Corporate bonds also offer many opportunities to diversify, as there is a broad spectrum of companies you can invest in, each of which carry varying levels of risk. They can vary from AAA to even junk bonds with ratings below BB+.
Risks of Corporate Bonds
The credit risks associated with corporate bond investments are significantly higher than that associated with municipal bond investments, as businesses are more likely to default on debt than municipal entities. Therefore, you need to pay very close attention to the ratings assigned by the accredited rating agencies.
Investing in Corporate Bonds
Nonetheless, so long as you research the track record of the companies you invest in very carefully, you will be able to find financially stable companies that are very well-established. Your credit risks can thus be much lowered, while you still earn higher interest on your corporate bonds.