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Simply put, a corporate bond is issued by a corporation to raise money to expand its business. Corporate bonds are exclusive to corporations and are not the same as bonds issued by municipalities or governments. Corporate bonds are typically listed on all the major exchanges and income associated with the investment in corporate bonds in usually taxable. The vast majority of trading in corporate bonds, in most of the larger developed markets, takes place in decentralized, dealer based over-the-counter markets.
Investing in corporate bonds, as compared to government bonds, exposes the investor to a much higher risk of default on the part of the cooperation. The risk, too, depends on the Corporation or Company issuing the bond and the current market conditions and government bonds to which the corporation is being compared. Corporate bond holders exposing themselves to the higher risks are compensated by receiving a higher yield than that which is paid for investing in a government bonds.
Investors who purchase corporate bonds purchase them for a variety of reasons to include the attractive yields they offer; the dependability of income; safety; diversity and marketability. Obviously, all these factors vary depending on the Corporation issuing the bond and the associated risks can vary greatly between corporate bonds.
Some of the risks associated can be broken down as Default risk, Credit Spread Risk, Interest Rate Risk, Liquidity Risk, Supply Risk, and Inflationary Risk. All these factors vary greatly based on the company and current market conditions relative to the timing and geographic location of the corporate bond investment and can huge financial implications, so it is wise to do your research and understand your own risk aversion and investing strategy before making investment decisions.
Talking with a financial adviser or other industry professional who understands you as an investor and who has a good grasp of all the prevailing market conditions associated with the particular corporation or company issuing the desired bond could save you a lot of money in the short and long run. By educating yourself and making your investments in Corporate Bonds based on knowledge and analysis you will be poised to capitalize on your investment no matter what the current market conditions may be.
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