Understanding the Corporate Bond Market

When you invest in the corporate bond market, you are essentially lending money to a business. This is considered debt financing; you are not buying a share of the company, as you would be with a stock. You are simply lending money to a business at a specified interest rate over a given period of time. Here are a few things to keep in mind about the corporate bond market and how it works. 

How Corporate Bonds Work

Companies issue corporate bonds to increase their cash flow. As an investor, you decide that you want to buy a bond in a particular company. You can use a broker to purchase the bond through a traditional trading account. The bonds are typically available in increments of $1000. You buy however many bonds you want at this price, and you will get a fixed rate of interest over the life of the bond. The broker should tell you how long the bond will take to mature.

After purchasing the bond, you will receive a set amount of interest at regular intervals. When the bond maturity date comes, you can cash it in for the face value. In other words, the benefit of this type of investment is the regular interest payments you receive from a company.

Understanding Corporate Bonds

To invest correctly in bonds, you should understand and know how to use a couple common terms. 

One frequently used term is "par value." The par value refers to the original face value of the bond. You can also purchase bonds on the open market for other amounts, though. If you pay less than the par value, you are getting a discount on the price. If you pay more than the par value, you are paying a premium.

Another term commonly used in the world of bonds is the "coupon rate." The coupon rate of the bond tells you the amount of interest that is going to be paid to the investor by the company that issued the bond. It is basically just another way of referring to the interest rate that is paid. 

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