If a corporation needs to raise money, it has the option of issuing a corporate bond. When you purchase a corporate bond, you are essentially granting that corporation a loan and it is backed only by their individual assets. In turn, you will be rewarded for your risky investment with a high interest rate.
Interest rates are not the only determining factor in how valuable a corporate bond may be, however. Review the following to better understand how corporate bond rates play into the overall value of a corporate bond:
Par Value: This is the principal amount of the bond. Corporate bonds are almost always issued with a par value of $1,000. However, the price of a bond may fluctuate above or below it’s original par value, changing its overall value.
Coupon: The interest, also known as the coupon, is usually paid to the bond owner semi-annually until maturity. The riskier the bond (how likely the corporation is to default), the higher the coupon. If your $1,00o corporate bond has a coupon of 10 percent, you will be paid $50 every six months ($100 per year) until it matures.
Yield: This is different from the interest rate because it changes with corporate bond prices. The yield can be calculated by dividing the coupon by the current value of the bond. The higher the yield, the more valuable the bond.
In general, corporate bonds are an excellent way to earn higher interest rates than other investments. However, even though these high rates can be attractive, know there is always some risk involved and the coupon payments you receive will be taxed as income.
Learn More About Corporate Bonds
- Determining Corporate Bond Yields
- How to Invest In Corporate Bonds
- Understanding Corporate Bond Spreads
- Three Steps for Buying Corporate Bonds
