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Corporate Bonds

Corporate Bond

A corporate bond is a type of debt security issued by a firm and sold to investors. The company gets the capital it needs, and in return, the investor earns a pre-established number of interest payments at either a fixed or variable interest rate. When the bond expires or "reaches maturity," the payments cease, and the original investment is returned.

The backing for the bond is generally the ability of the company to repay, which depends on its prospects for future revenues and profitability. In some cases, the company's physical assets are used as collateral.

Corporate Bond Ratings

Before issuance, bonds are reviewed for the issuer's creditworthiness by one or more of three U.S. rating agencies: Standard & Poor's Global Ratings, Moody's Investor Services, and Fitch Ratings. Each has its own ranking system. The highest-rated bonds are commonly referred to as "Triple-A" rated bonds. The lowest rated corporate bonds are called high-yield bonds and usually carry a higher rate of return due to their higher risk and potential for non-payment. These are also known as "junk" bonds.

 

Call Risk

Many bonds allow the issuer to repay all or a portion of the bond before the maturity date. The investor's capital is returned, sometimes at a premium added price, in exchange for the early debt retirement. If a bond is called you will get your initial investment back, just earlier than expected.