When you buy corporate bonds, you are
investing your money that will be used to expand or enhance the company
that issued the bond. The company promises to give back your principal
amount by a set date and until then it pays you a regular interest, most
often semi-annually. This interest is taxable.
What are the Different Types of Corporate Bonds?
- Collateral - This corporate bond uses other securities as collateral.
- Mortgage - This bond is backed by mortgages on assets or physical property owned by the company.
- Equipment trust certificate - These bonds offer the company's equipment as backing.
- Zero coupon bonds - No periodic interest is paid on these bonds. But since they are sold at a discount and the investor gets full face value of the bond at maturity, he gets a profit.
- Convertible bonds - These bonds can be converted into other securities - the common stock of the issuing company.
- Floating rate bonds - With these bonds, the coupon rate can be changed if a commitment had been made at a lower rate whereas the present interest rates are on the rise.
- Callable corporate bond - The issuing company has the right to get back the security on a set date before maturity. This could be disadvantageous to the investor, if reinvestment is available only at a lower interest rate.
- Putable bonds -In these type of bonds the investor has the right to put the security back to the issuer and so, these are advantageous when the interest rates are rising.
- Step up bonds - Step up corporate bonds permit a fixed rate of interest until the call date, after which the coupon increases if the bond is not called.
- Step down bonds - In these type of bonds a fixed rate of interest is paid till the call date when the coupon decreases if the bond is not called.
How can Corporate Bonds be Bought?
Investments require judicious
planning and decision-making that may need the services of a broker.
Personal research into the different bonds and the companies offering
them is very important to make an investment decision suited to your
needs and circumstances. Nevertheless, you can get informed guidance on
the different aspects of your investments through corporate bond
brokers. There are two kinds of brokerages that will do the research
work for you:
- Full service brokerages will research the markets, identify the best investment choices for your particular objective, guide you in your decision, and finish the entire transaction. Of course, the fees they charge for their services are understandably high.
- Discount brokerages offer to do research for information, but they will not guide or advise you in your decision-making. You are responsible to use the information you get to make a wise investment.
To get the assistance of a good
corporate bond broker, do some initial research on which brokers are
licensed by The National Association of Securities Dealers [NASD]. Being
licensed by the NASD means the broker has gone through a rigorous
training and evaluation as well as a screening process. The NASD website
carries information on licensed brokers.
Once you have chosen your
broker, a personal account will be opened for you. Also, a questionnaire
that contains pertinent information about you will be filed, so that
you will be guided to choose the types of investment that best fits you
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