Corporate Bonds
As the name suggests, corporate bonds are simply bonds that are issued by corporations. So just
like a company can issue stock as a form of dividing ownership up amongst many investors, companies can also issue bonds to raise
capital from investors for funding the needs of the corporation. In other words, bonds are a debt security issued by a corporation,
while stocks are an equity (ownership) security.
The yield (interest) on a bond issued from a corporation is likely to be substantially larger than that you would
receive from a municipal bond or any other government-issued bond. That’s because
there's a much greater risk that the corporation who issued the bond won’t be able to pay it back to the investor. It is very
unlikely that the government would default on its bond debts, but much more likely that a corporation will. To compensate for
the increased risk, they pay a larger amount of interest. Keep in mind, however, that in general bonds are still much less
volatile than stocks.
Within the corporate realm there are subcategories of the types of bonds that may be available such as convertible bonds,
which the bondholder can convert into stock shares, and callable bonds which allow the bond issuer to redeem the bond prior
to its maturity.
