A type of debt security that is sold to investors by a company is known as a corporate bond. Investors are basically lending money to the firm that is issuing the bond whenever they purchase corporate bonds. In exchange, the firm agrees to pay interest on the principal and, in certain situations, to repay the principal when the bond matures or comes due, which usually takes 1 to 30 years.
Corporate bonds are typically offered by a corporate trustee, who is a third party. A bank or trust agency that verifies bonds and keeps records of them whenever they are sold is known as a corporate trustee. Once the corporate issuer fails to make interest or principal payments, the trustee is responsible for maintaining the bondholder’s rights.
Together with lines of credit, equity, and bank loans, corporate bonds constitute an important source of capital for several businesses. They are frequently provided to give immediate cash for a specific project that a firm wishes to undertake. In exchange, investors should consider the risk, duration, and type of interest rate provided by corporate bonds.
Advantages of a corporate bond:
- There is a diverse range of corporate issuers and bonds from which to choose.
- The corporate bond market is one of the world’s most liquid and active.
- Compared to stocks, corporate bonds are less risky and volatile.
Disadvantages of a corporate bond:
- Most corporate bonds need to be purchased over-the-counter (OTC).
- Investors in corporate bonds are exposed to both credit and interest rate risk.
- Generally, reduced risk equates to lower return.