Corporate Bonds

Archive for the ‘Types of Bonds’ Category

A lot of people are attracted to the high interest Corporate Bonds. Why? Because the higher the interest Corporate Bonds give, the higher the monthly (or quarterly) income the corporate bond owner receives. However, there are many drawbacks to high interest Corporate Bonds.

High interest Corporate Bonds vs high yield Corporate Bonds

Firstly, high interest Corporate Bonds are not the same as high yield Corporate Bonds. A corporate bond can have very high interest rate and have poor yield. If you see a corporate bond with, say, 15% interest rate, then you will think this is a high interest corporate bond that will give you a lot of money per month.

While it is true that high interest Corporate Bonds will give you higher monthly income, you need to think about the cost of keeping or buying those Corporate Bonds.

Cost of buying high interest Corporate Bonds

First of all, you need to think of why the corporate bond has such high interest. Usually Corporate Bonds Are set competitively. The reason why some corporate bonds have higher interest rates than others may be because there are cons and negatives that come with the corporate bonds.

For example, the corporate bonds may be sold at high premium value. This is common because many people want the high interest rates so they are willing to pay more for the bonds. If you are buying a high interest rate corporate bond at large premium, then the end result is that you are not getting such a good deal. You are paying for the high interest payment upfront. If you calculate the yield of this corporate bond, you will realize that it is not such as good buy.

Another example of why a corporate bond has high interest rate is that the issuer may be in financial trouble. The instability prompts the issuer to issue corporate bonds with very high interest rates to attract investors. These corporate bonds will not have high ratings by Moody's or S&P. So, you are basically gambling and investing in risky corporate bonds. If you know the ratings and still want to invest and gamble with your money, then you can look into investing in these high interest corporate bonds. But, make sure that you know what you are doing and what the risks involving these high interest Corporate Bonds Are.

Compared to high yield corporate bonds, high interest Corporate Bonds Are for short term investing, emergency cash rather than long term investments because the issuer of the bond may go bankrupt leaving you with nothing. Before investing in a corporate bond, you should calculate the yield of the bond, rather than looking at the interest rates alone.

You can buy both premium and discounted Corporate Bonds. Like other types of bonds, Corporate Bonds are sold at either premium or at discounted prices. Once issued, the Corporate Bonds are sold in the secondary market. Corporate bond prices are usually determined by interest rates as well as the issuer's circumstances.

What is a Corporate bond premium?

Before we discuss what a corporate bond premium is, let's discuss what the par or face value of a corporate bond is. Bonds, including Corporate Bonds, are issued with a face value or par value of $1,000. This par or face value is the amount that the investor loans to the issuer for the bond and is the amount that is repaid back to the investor by the issuer when the corporate bond matures.

In the secondary market, Corporate Bonds can sell for any prices depending on the bond market and the interest rates. Corporate Bonds can sell:

1. at par
2. below par (at a discount)
3. above par (at a premium)

Usually the corporate bond in the secondary market will not sell at par, the price of a corporate bond is either above par or below par depending on the corporate bond's issuer's financial stability and the overall interest rate trend.

Should I buy the corporate bond at a premium?

Usually the cheaper you can buy the corporate bond the more yield (profit) you have. However in some markets, it is not possible to buy A-rated Corporate Bonds below par (at a discount) so you may have to settle buying the corporate bond at premium because you want the monthly interests that the Corporate Bonds pay or some other benefits.

If I bought the corporate bond at discount, will I get the original amount I paid back when the bond matures?

If you buy the corporate bond at a discount, such as below $1,000, then when the corporate bond matures you will get the $1,000 face or par value, not the original discounted price you paid.

Similarly, if you buy the corporate bond at premium, you will only get the face value back when the bond matures, not the original expensive price you paid for the bond.