How Safe Are Corporate Bonds  

       Corporate bonds are nothing but lending money to a business so that the business can expand, buy new equipment or build a manufacturing unit. You, the lender, lend money to companies which in turn pay you interest for the money. The companies promise to repay the money to you are a pre-determined date known as the maturity date.

       Corporate bonds are usually sold in multiples of $1,000 and the interest is pre-determined and usually paid semiannually. The interest is taxable and you have to declare it at the time of filing your taxes. A point to remember is that although you get interest from the company for the bonds purchased, you have no ownership interest in the company. You have no say as to how the money can be invested by the company.

       In the US, the corporate bond is huge and the daily trading of corporate bonds is approximately $23 billion. These bonds are traded over the counter market, i.e. there is no physical location for this market. Buying is done through dealers and brokers, who are located all over the country , and the dealing is done either through telephone or electronically.

        Usually large financial institutes like banks and insurance companies buy corporate bonds but even individuals can invest. Corporate bonds are considered to be relatively safe as there is a safety mechanism in place which allows an investor to judge the bond’s credit worthiness. This is done through a rating system after taking into account the issuing company’s credit history and previous record of debt repayment. There are credit agencies like Standard and Poor’s and Moody who rate bond issuing companies. The higher the rating, the safer is your investment.

        In order to determine how safe are corporate bonds, one must take time to study the ratings issued by rating agencies and investment must be done accordingly.

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How Safe Are Corporate Bonds




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