Bonds Corporation

By: EconomyWatch Content   Date: 28 October 2009

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Bonds Corporation or corporation bonds are IOUs or debt obligations issued by public and private corporations. Usually, they are issued in multiples of $1000 and $5000 by companies:

·        to raise money so that more facilities can be introduced

·        for expanding their businesses

When buying corporate bonds, you are only lending or loaning to a company. The issuing company has to pay back your money with the interest yield upon maturity of bonds. You do not have any ownership or equity in the company. The interest income from your corporation will be paid either annually or semiannually. The interest income is taxable and you should declare it.

Bonds Corporation: Ratings

Rating Agencies such as Moody’s, Fitch and Standard and Poor are private companies that assess:

·        an issuer’s financial health and

·        the company’s ability to meet the obligations on time.

In such cases, the rating is an instrument with which one can decide whether the issuing company will repay the principal with the interest income on time and in full. When a rating agency downgrades the bonds of a particular issuer, the price of the bonds will decline. Also, there are possibilities that the price will not go down because the investors consider many other factors while making investment decisions. This means that the price of a particular bond may go down even without a downgrade. Likewise, when a bond is upgraded, the price may rise.

Bonds Corporation: Risks

Corporate bonds have higher risks compared to government bonds or the US Treasury bonds. The risks you will take with corporate bonds will depend upon the particular company that issues the bond and the prevailing conditions of the government and the market. The corporate bond holders receive higher income than government bond holders, since the former takes much more risks than the latter.

Corporations have the risks of default which can be measured through spread analysis. Spread analysis is used to determine the differences in yields between treasury bonds and corporate bonds upon maturity.

With bonds corporation or corporate bonds, you can get a higher level of income than the US treasury bonds. However, the risks are more. For those who prefer not to take risks, it is advisable to opt for US Treasury bonds and get modest returns.

 

 


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