Corporate bonds create cash flow for corporations. When you purchase a corporate bond, you are lending the corporation your money and assuming risks like with any other type of loan. Read some facts about corporate bonds before you invest.
Primary Bonds
The two types of corporate bonds are primary and secondary. Primary corporate bonds are new issues, similar to IPOs on the stock market.
Secondary Bonds
Secondary corporate bonds create additional cash flow for existing companies.
Availability
Primary corporate bonds are offered privately, so it is difficult for novice investors to enter this market. Secondary bonds can be obtained through your broker.
Return
When you purchase a corporate bond, the term and interest rate is specified such as 10 years at 6 percent. However, if you sell the bond prior to maturity, you risk losing money, depending on market conditions.
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Risks
The corporate bond market goes up when interest rates fall and vice versa. For example, if you attempt to sell your 6 percent bond when rates are at 8 percent, you risk losing money, including some of your principle.
Benefits
The higher the risk, the higher the return if the company is successful. However, you equally risk the company defaulting, so due diligence is needed.
Oversight
Since corporate bonds are not publicly traded, researching them is more difficult than researching stocks. The Financial Industry Regulatory Authority (FINRA) can provide some guidance through their TRACE System.