Three Main Uses Capital Appreciation Income Safe Investment

What is it?
Similar to a mortgage with a bank, bonds are an issue by a borrower to a lender. When you buy a corporate bond you are loaning your money to a corporation for a predetermined period of time, (the maturity). In most cases the bond’s par value is $1,000, this is the face value of the bond and the amount the lender will be repaid once the bond matures.

Obviously you're not going to loan your money for free. The borrower must also pay you a premium or " coupon " at a predetermined interest rate in exchange for using your money. These interest payments are usually made every 6 months until maturity is reached.

There are three important factors you need to consider before buying a bond. The first is the person issuing the bond. The second is the interest (or coupon) you will receive. The third is the maturity date, the day when the borrower must pay back the principal to the lender.

Objectives and Risks:
They offer a slightly higher yield because they carry a higher default risk than government bonds. Corporate bonds are not the greatest for capital appreciation, but they do offer an excellent source of income, especially for retirees. Corporate bonds are also highly useful for tax deferred retirement savings accounts, this allows you to avoid taxes on the semiannual interest payments.

Risks associated with corporate bonds depend entirely on the issuing company. Purchasing bonds from well established and profitable companies offer much less risk than one in financial trouble. Bonds from extremely unstable companies are called junk bonds and are very risky because they have a high risk of default.

How to Buy or Sell it:
Corporate bonds can either be bought through a full service or discount broker, commercial bank, and other financial intermediaries. The best time to buy a corporate bond is when interest rates are relatively high.

Strengths:

many corporate bonds offer a higher rate of return than government bonds for only slightly more risk. the risk of losing your principal is very low if you only buy bonds in well established companies with a good track record. This may take a bit of research.

Weaknesses:

fixed interest payments are taxed at the same rate as income. corporate bonds offer little protection against inflation because the interest payments are usually a fixed amount until maturity.

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