Definition and Overview: Corporate Bonds
Corporate bonds are very similar to all other types of bonds, such as Treasury or Municipal bonds, in that they are a debt instrument.
The primary difference is simply that corporate bonds are offered by a company, instead of being offered by a government or different type of organization.
Corporate bonds are a form of loan, where an investor gives some of his or her money to the company offering the bond, in return for being paid interest on that loan.
Additional Definition and Review of Corporate Bonds
The exact characteristics of any particular corporate bond depends on the corporation that is offering the bond.
Nevertheless, they do share a few commonalities.
For one thing, corporate bonds normally pay a better coupon rate than government bonds.
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This means that you’re offered more interest in return for your investment. However, this comes with an increased risk.
Governments are viewed as very stable, long-term organizations, especially in the developed world.
Therefore, there is a very low risk of a government ever not being able to pay back a bond.
However, corporations fail every day.
As evidenced by the financial crises in 2009, even the biggest corporations can fail.
Therefore, the risk of default is higher on corporate bonds.
It is up to you as an investor to weigh the risk of default versus the higher interest payment, and to decide whether or not the corporate bond is an investment that makes sense to your portfolio.
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