When a corporation needs to find extra money, one of the ways they raise funds is through selling bonds. You are basically loaning the company money when you purchase a corporate bond. This is the riskiest form of fixed-income securities. They are only backed by the individual corporation who may be likely to suffer from serious financial problems. But you will be compensated for the risk. Corporate bonds pay a higher interest rate than is paid on most government securities. You interest rate is called the coupon. By holding the bond until maturity, you receive the full face value of the bond - if the company doesn't default. If you well before the maturity date, you may lose some of the principal if interest rates have risen. Bond prices fall when interest rates rise. They rise when interest rates fall. For example, you buy a 10-year bond with a face value of $5,000 and a coupon of 6%. After three years you decide to sell your bond. Interest rates have risen to 8%, making your bond worth less because a new bond will pay more than your old one. But if you are receiving higher rates than newly purchased bonds, you will get a premium for it. There are two agencies, Standard & Poor's and Moody's, which assign credit ratings to corporate bonds. The rating is based on the company's ability to repay its debts. The poorer the rating, the higher the risk. And the more interest you will receive. You are being paid to accept the risk that the company might default and you will lose your money. Even the most well known companies can have problems. For example, Ford Motor Company bonds were once rated at near junk status. Investors were paid high interest rates for their investment. This is a very risky investment. If you are a new investor, you should probably stick with lesser risk bonds. Corporate bonds are purchased through a broker or by visiting the company's website for contact information. The best way for most individuals to buy corporate bonds is through a bond fund. Bond funds give you exposure to a wide variety of companies, therefore reducing the risk. Check with a fund rating company to research the fund's performance. With bond funds there is no guaranteed return of the principal. While each bond has a maturity date, the fund does not. You will have to sell your shares to exit the fund. |
