Buying a bond is basically extending a loan to a “borrower.” With corporate bonds, a company is borrowing money (usually a minimum of $5,000 and going up in increments of $1,000 from there). Like a loan, a corporate bond usually has a fixed interest rate, so you’ll receive set payments from the company, typically twice a year. The length of the loan can vary from one year up to 40, and at the end of that time period, the company pays you back the original face value of the loan.
Why consider corporate bonds?
Corporate bonds are considered a fixed-income type of investment. It’s called fixed income because these kinds of investments are designed to pay investors a steady income.
Those payments can be used one of two ways:
- Stream of Income – Bonds can provide a predictable, steady stream of income when you retire or anytime. They can be combined with other sources of income from pensions, Social Security or other investments.
- Portfolio Protection – When used as part of a diversified portfolio, bonds can help smooth out your portfolio’s returns. Over the long-term, bonds have been less volatile than other types of investments, like stocks.