So Many Shoes, So Little Money – Blog

Corporate Bonds

August 5th, 2009

Just as flats are a sensible and versatile shoe for women, corporate bonds can a sensible and versatile investment for the beginning investor. A corporate bond is a loan to a company for a set period of time. If you have been reading this blog then you already know all about them – they are pretty much the same as US Treasuries. The exact same explanations and logic apply except that corporate bonds (or “Corporates”) aren’t guaranteed by the US Government. Rather, they’re guaranteed by the particular corporation from whom the bond is purchased. Therefore, they are a bit riskier than treasuries but, as a result, pay a bit more in interest (a “higher return”). (Remember, the lower the risk, the lower the return; the higher the risk, the higher the return.)

When you buy a corporate bond, you agree to loan your money to a particular company, rather than the US government, in exchange for interest payments that the company will make to you. You can buy corporate bonds from a lot of different companies (lots of different types of companies sell bonds), for example Microsoft or AT&T. Buying a corporate bond is considered riskier (less safe) than buying a treasury or savings bond. Why? Because treasuries and savings bonds are backed by the US government while a corporate bond is backed only by the particular company from whom the bond is purchased. And, unlike to government, a company can’t print more money or raise taxes to pay its debts.

Just like with treasuries, the company that issues the bonds you buy will return your money (your initial investment) plus the interest you’ve earned (the company selling the bond sets the interest rate at the time they issue their bond) once the bond has run its course at a later set date (maturity).

Usually you receive your interest rate payments in the form of checks, sent out within a set time frame, often semi-annually. Then, when the loan matures, you receive the full amount of your original loan back. The original amount you loan the company is called the “Principal”.

Company bonds usually refer to loans that are longer than one year, but like the US government, corporations can also issue shorter term loans. These shorter term company loans are called “Commercial Paper”.

More corporate bonds tomorrow.

Filed under: Money Management

Tags: Bonds, Investing