Corporate bonds are like lending money or providing a loan to a business. The lender loans money to a company or corporation, in return the corporation pays you interest on the money that you have lent them. The company that has borrowed the money commits to you or gives you their promise that they will pay back the money borrowed on a pre-arranged date. This is called the maturity date.
Corporate bonds usually come in multiples, like $1, 000 or $5,000. Interest on the money is paid to the lender. This amount is usually pre-determined and paid semiannually. The interest received from the corporate bonds is taxable and must be declared.
Even though you have borrowed money from the company in the form of a corporate bond, it does not mean that you have any interest or ownership of the company or business. This means that you have no say in what the company does with the money you have invested with them or their own capital.
How big is the market and who trades them?
The market for corporate bonds is huge with daily trading of $23 billion. Corporate bonds are usually traded in the over-the-counter market. An over-the-counter market means that there is no specific location or shop where the corporate bonds market is situated. Instead there are dealers and brokers all around the country who trade over the phone or electronically.
The main investors in corporate bonds are large financial institutions, such as banks, insurance companies and pension funds. Individuals also invest in corporate bonds for the benefits corporate bonds offer as an investment. Anyone who has money to invest can trade in the corporate bond market.
What are the benefits of investing in Corporate Bonds?
Investors buy corporate bonds because of the many benefits available from investing in this market. Some of these benefits include:
* Safety, bonds work on a rating system that goes on the company’s credit history and its prior record for repaying debts. The higher the rating of the company, the safer the investment will be.
* A steady income can be obtained from corporate bonds. This is a great idea to protect the principal amount of money, yet still gain an attractive income from the investment.
* There is a wide choice of sectors, credit-quality and structures of businesses, offering investors a large variety to choose from.
* Corporate bonds are easy to sell. If an investor does choose to sell his or her corporate bonds before they mature, it is not only easy but also quick to sell corporate bonds. This is largely due to the market being is so large.