Corporate bonds are debt instruments issued by an insurance company to raise capital. They are designed to be risk free for the investor, who receives a stated interest rate on the debt.
These bonds have many uses in business. They are one of the most popular types of debt instrument that companies use to finance their growth and expansion plans. The advantages of corporate bonds include low cost, high liquidity, and tax-free investments.
Before you start investing, however, you would do well to acquaint yourself with some of the benefits, but also with some of the risks, of investing in corporate bonds. Enlightening you on this is the purpose of this article.
Why Invest in Corporate Bonds?
Corporate bonds come with a variety of potential upsides, both for the company and the investor. While they make it easier for the company to raise funds, they provide investors with the security of fixed interest rates, and an income that is linked to the performance of the company in which it is invested. Some more reasons to invest in corporate bonds include:
- Interest rates are quite low in comparison to other investment options available today.
- They offer a predictable future return on investment – this makes them appealing for conservative investors who want a guaranteed return on their capital, but aren’t too comfortable with riskier investments like stocks or real estate.
- Companies tend to reinvest these profits back into their business operations, thus creating a steady stream of revenue and profit over time for investors who keep their money in corporate bonds.
What are the Risks of Investing in Corporate Bonds?
As with all other investments, corporate bonds do have a few risks that you should be aware of. These can be divided into two groups: interest rate risk and default risk.
- Interest rate risk is the threat that an investor will incur losses due to interest rate changes.
- Default risk is the threat that a borrower will default on their debt obligations.
Investors will have to decide which type of risk they are most comfortable with, since both can have negative consequences for an investor if they cannot cope with the market condition.
The decision of whether or not to invest in corporate bonds is ultimately up to each investor, but it should be taken into account that bonds are considered sufficient when interest rates are low and there is no default risk on the issuer’s debt.
How Am I Protected When Investing in a Corporate Bond?
There are various ways in which an investor is protected when investing in a corporate bond. Corporate bonds differ from other forms of debt in that they are issued by companies rather than individuals. The loan is raised by the company with the goal of meeting their financial obligations while maximizing return for investors. Investors who buy bonds usually do so to earn periodic interest payments on their investment, while some may also purchase them to receive fixed dividends over time.
The main protection that an investor has while investing in a corporate bond is that they can, at any time, sell their bonds on the secondary market and get back their original investment plus interest on top of it. This lowers the stakes to a significant degree, and makes it easier for the budding investor to start diversifying their portfolio by pooling some of their available capital into corporate bonds – are you one of them?