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Corporate Bonds
Businesses, sooner or later will need cash. It can be for new locations, new equipment, expansions, whatever they need to make the business grow and compete. It all boils down to three choices when they need cash: issue stocks, borrow, or issue bonds.
There are dozens of varieties of corporate bonds and many of them include call options within them. This little provision allows the issuing company to pay of their debt early, leaving you with your principal and whatever interest accumulated to that date. Sometimes companies will convert the bond into shares of stock in the company. This is a good thing is the underlying value of the stock is good (and that would be determined by you at the time of purchase).
Corporation like to issue fixed rate bonds with set maturity dates. Floating rates are used in some instances to determine the interest rate paid, tying the rate to some Treasury index or a money market.
Zero Coupon bonds work like this: You buy the bond for a deep discount and when the company pays you back, they pay the principle plus the face value of the bond.
The risk comes in the ability to repay. Simple as that. So how do you know who can pay and who can't. The BlueCollarDollar suggests that you use a fund manager whose specialty is bonds. This is the easiest way around a complicated issue. But there are ratings systems available.
Moodys is the most often used when rating corporate bonds. Below is a list of the letter type grading system they use.
The following are summaries of the definitions of Moody's ratings for long-term bonds. Aaa Best quality, with smallest degree of investment risk. Aa High quality by all standards; together with the Aaa group they comprise what are generally known as high-grade bonds. A Possess many favorable investment attributes. Considered as upper-medium-grade obligations. Baa Medium-grade obligations (neither highly protected nor poorly secured). Bonds rated Baa and above are considered investment grade. Ba Have speculative elements; futures are not as well-assured. Bonds rated Ba and below are generally considered speculative. B Generally lack characteristics of a desirable investment. Caa Bonds of poor standing. C Lowest rated class of bonds, with extremely poor prospects of ever attaining any real investment standing. There is definitely more money to be made in corporate investments than with municipal type bonds, but the risk is also greater, and the interest is taxable.
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