What Are the Benefits of Corporate Bonds?

Corporate bonds are issued to fund factories, railroads, office buildings, technology, and anything else that contributes to the development of commerce.

Corporate bonds are a cornerstone of capitalism. They provide a way for corporations to borrow hundreds of millions of dollars to finance product development, growth and global expansion.

Function

Large institutional investors that need to make multimillion-dollar investments, such as pension funds, mutual funds and foundations, buy corporate bonds for their investment portfolios because they pay higher interest than Treasury bonds and, if rated investment quality (AAA, AA or A), are considered safe investments. This allows corporations to borrow large blocks of funds they couldn't access by issuing stock.

Types

Maturities range from notes that mature in one to 10 years to bonds with maturities out 30 years or more. Bonds that have first right of recovery in case of bankruptcy are called first mortgage bonds. Unsecured bonds are called debentures and subordinated debentures.

Features

Interest is paid semiannually and in most cases must be paid before dividends can be paid on stock if there is a financial crisis in the issuing company. Some corporate bonds have other provisions, such as collateralization by specific assets, conversion to stock or put options to shorten maturity. They are issued in units of $1,000 per bond, and some are listed on the NYSE and traded in smaller amounts called odd lots.

Significance

Corporate bonds are debt on a company's balance sheet and do not dilute the ownership of the company. This is important because issuing bonds keeps the stock price of a company higher than if the company issued new stock to fund its capital needs.

Considerations

Corporate bonds are good investments for individuals and can be bought in amounts as small as one bond. It is best to hold them to maturity, because it is not easy to sell an odd lot if you need the money. A better way to invest in corporate bonds is through a corporate bond mutual fund.

References

• Securities Industry and Financial Markets Association, "Benefits of Investing in Corporate Bonds"
• Victoria Duff - see comment section

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