Advantages & Disadvantages of Corporate Bonds

Corporate bonds are debt instruments because money is lent to a corporation. In taking money, the corporation issuing the bond promises interest (also called "coupon"). There are some advantages and disadvantages to corporate bonds over government bonds.

Higher Coupon Rate

Corporate bonds generally pay higher coupon rates than government bonds because there is more risk associated with them.

Profit as Interest Rates Drop

As interest rates fall, new bonds are issued with lower coupon rates since there isn't as much need to be competitive. When this happens, high interest bonds can be sold for a profit.

Often Convertible to Stock

Corporate bonds can be converted into common stock of the company; this removes the interest, but allows them to be sold at the market value of the stock.

Ethical Concerns

If money is lent to a company in the form of a bond, it may do things with the money that are objectionable to investors, either morally or ethically.

Less Security

Corporate bonds are not backed by anyone except the corporation; there is no recourse if the company goes out of business.

Possible Loss When Sold

If interest rates have gone up since the bond was purchased, or if the company has become less stable, losses could occur if the bond was sold.