What are Corporate Bonds

Just like the government issues bonds so do corporations. Instead of issuing bonds to pay for public works, corporations issue bonds in order to pay for new business ventures. When a corporation needs money to create new stores it will issue bonds. The bonds corporations issue can yield more than similar government bonds but also may carry more risk.

The yield of a new corporate bond issue is determined by a number of factors. The primary of which is the credit rating of the issuing company and the current yield of other bonds with similar durations and ratings. The higher rating a bond receives the lower interest rate it will pay and visa versa.

Credit ratings are assigned by a multitude of rating agencies such as Standard & Poor’s. An investment grade bond would be rated either AAA, AA, A, or BBB with AAA being the highest rating possible. Some rating agencies, such as Standard & Poor’s also assign pluses + and minuses - too their rating. A plus designates a better credit rating and a minus designates a worse credit rating.

As with every other investment on this site we recommend investing in corporate bonds through an index. Investing in bonds through an index will insure diversification and prevent a total loss should a bond issuer default. A multitude of bond indexes exist and can be easily invested in through mutual funds and ETF’s. Hopefully you can now answer the question, “What are Corporate Bonds?”