Corporate Bonds

If you read the page on Series EE Savings Bonds, you will recall that those bonds let you lend money to the U.S Government. Similarly, you can buy corporate bonds that let you lend money to companies.

When companies want to expand or finance a new investment, they will sometimes raise money by issuing corporate bonds. There are two ways to buy corporate bonds. One way is from the company itself. In that case you pay what is called the par value, or face value. As long as you hold the bond, you receive semiannual payments based on the interest rate of the bond. When the bond reaches the maturity date, you get back the original amount you invested.

The other way to buy bonds is on the secondary market, meaning you buy it from someone else who wants to sell it. In this case, you could pay above or below the par value, depending on if interest rates have gone up or down. If you own a bond and the price goes up, you can sell it on the secondary market to get money that way.

Pros of corporate bonds.  Corporate bonds are generally considered safer than stocks, although not always. If the company goes bankrupt, the bond holders get their money back first, and if anything is left, then the shareholders get theirs. However, this does not guarantee that you will get your money back.

Bonds are graded based on the credit worthiness of the company. The highest grade is AAA, while the lowest is C. At this stage of your investment experience, it is best to stick with bonds graded as AA or AAA. As you gain experience, you might be able to get greater returns by investing in lower quality bonds, which usually offer higher interest.

Cons of corporate bonds.  While bonds are frequently safer than stocks, you can still lose money if the company is unable to pay back the loan. This is more likely if you start investing in lower quality bonds, which is why it is best to stick with AA or AAA bonds in the beginning. \r\n Another problem with bonds is that some are callable bonds. This means that the company issuing the bond can decide to pay back the loan early. At first this might seem good because you get your money back. However, if the company decides to call the bond, it usually means the interest rates have dropped and they want to issue new bonds at the lower rate. That means that if you want to reinvest the money into new bonds, you might have to do it at the lower rate.

You can buy bonds individually from some brokers like Fidelity. Or, if you prefer, you can also buy bond mutual funds as well.