Your investment options are almost limitless. Unfortunately, it’s a little trickier to figure out where to stash your money because there are so many options. Determining which direction you’d like to go might require an in-depth risk and goal evaluation on your part. Here’s an avenue to consider — why not add corporate bonds to your portfolio? Learning how to buy corporate bonds can help you and your business diversify.
What are Corporate Bonds?
Corporate Bonds are debt instruments issued by companies and corporations to raise money from investors. When an investor buys a corporate bond, they lend their money to the company in exchange for a fixed rate of interest payments over a specified period of time. At the end of this period, the company repays the original amount borrowed — known as the principal — along with accrued interest payments.
Investors are attracted to corporate bonds because they tend to carry higher interest rates than other types of debt, such as government bonds. This feature can be beneficial to investors looking for a steady stream of income or those wanting to diversify their investment portfolios. Corporate bonds can provide stability and potential capital gains if the company’s credit rating improves over time. However, they are not without risk.
Buying a Corporate Bond: Step by Step
A bond is a debt obligation, or in less-fancy terms, an IOU. When you buy a bond, you lend money to the corporation that issues them. The corporation then makes a legal commitment to pay interest on the principal when the bond comes due or matures. When a bond matures, you should receive the principal plus interest on the bond.
Corporations might issue bonds to fund capital improvements, expansions, acquisitions, research and development, pay shareholder dividends or refinance debt. They are one of the largest sectors of the U.S. bond market, which also includes U.S. Treasury bonds, other types of government bonds and municipal bonds.
If you’ve read through the bond classifications, considered the nuances of risk. evaluated your risk tolerance level and understand why you’d be interested in adding corporate bonds to your portfolio, you’re ready to buy. Take just a few steps to get that accomplished.
Set Up a Brokerage Account
You can choose to work with an online brokerage, bank, bond trader or broker to buy a corporate bond. Benzinga reviewed dozens of brokerages and narrowed down the best online brokerage to buy corporate bonds. You can review the full rankings for the best online brokerages or take a quick look at the favorites below.
Narrow Your Bond Choices
Research sector, growth and performance and use Benzinga’s Best Bond Funds to choose the right option for you. Even if you already know how to buy corporate bonds, you need to consider your options carefully.
Check Your Narrowed List for Bond Ratings
Use one of the two biggest ratings firms — Standard and Poor’s and Moody’s to check financial stability, debt and other risk factors. Look for bonds with letter grades that range from AAA or Aaa to BBB or Baa, which are considered investment grade. Bonds with a BB or Ba rating or below are junk bonds. Steer clear of these because they're issued by companies with liquidity problems.
Place Your Order
You'll find bond prices quoted as a percentage of the face value of the bond. Some corporate bonds trade on the over-the-counter (OTC) market as well.
Best Online Brokers
Start investing in bonds today with high-quality brokers that fit your trading needs. Below is Benzinga’s favorite brokers.
Bonds can be classified in several different ways, including by their maturity, interest payment offerings and credit quality. Because there are so many classifications of bonds, you should not be afraid to diversify by purchasing several different types of bonds and layering them for your benefit.
Bonds have different maturity rates, and longer-term bonds often offer higher interest rates but may contain more risk. The length of time varies, depending on the type of bond you’re considering:
- Short-term bonds: One to three years
- Medium-term bonds: Four to 10 years
- Long-term bonds: More than 10 years
Several types of interest payments exist for corporate bonds, which include:
- Fixed rate: With this type of corporate bond, you receive the same payment each month until maturity. Interest payments are called coupon payments.
- Floating rate: This type of interest rate resets periodically, and they’re based on a benchmark, such as prevailing interest rates on a bond index.
- Zero-coupon: These types make no coupon payments. Instead, at maturity, the bond issuer makes a payment that is more than the purchase price.
- Convertible: These are like regular fixed-rate bonds except you can convert them to shares of stock. Because of this option, your interest rate on convertible bonds will be lower.
Bonds have different credit ratings, and it’s imperative to pay attention to the types of credit ratings. They can be considered investment grade or non-investment grade. You’ll more likely be paid on time if you invest in an investment-grade bond over a non-investment grade bond. If you do invest in a non-investment-grade bond, your interest rate will likely be higher to compensate you for your investment in a riskier bond.
Why Learn How to Buy Corporate Bonds?
If you’re interested in a relatively safe investment, corporate bonds could be the way to go. They often offer higher returns than CDs or government bonds and can be a good way to preserve principal and provide yourself with a steady income. They offer you the ability to invest in a variety of sectors and are a little bit more flexible than CDs because you can take them out before they mature if you really need the money.
Like any investment, learning how to buy corporate bonds is just one part of a well-diversified portfolio. If you’re 25 years old, it might not be advisable to invest many of your assets in bonds, but if you’re 65, that might be a different story. See how retirees might consider investing in bonds in Benzinga’s Best Investments to Buy for Retirees.
Best Corporate Bonds Right Now
As you shop around, you want to get it right. Check out Benzinga's top picks for the best corporate bond funds.
1. Vanguard Long-Term Corporate Bond ETF
You can count on Vanguard for low fees, and the Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT) doesn't disappoint. Its expense ratio is only 0.05%, while the average expense ratio of similar funds runs up to 0.70%. The ETF's largest issuers include industrial (69.3%), finance (16.8%) and utilities (12.2%). Its distribution by credit quality ranges from Aaa to Baa so you'll rest assured that the ETF delivers a quality bond rating. Historical returns hover just over 8%.
2. iShares iBoxx $ High Yield Corporate Bond ETF
The iShares High Yield Corporate Bond ETF (NYSEARCA: HYG) includes exposure to a broad range of U.S. high-yield corporate bonds and qualifies as a high-grade bond. It comes with a high expense ratio of 0.49% but has offered returns of over 5%. Its top holdings include Altice France SA, Sprint Corp., Transdigm Inc. and Ford Motor Company.
Align with Goals
Corporate bonds offer potential bondholders the opportunity to diversify their portfolios and achieve predictable returns. With various options available, investors can select bonds that align with their risk tolerance and financial goals. Understanding the steps to buy corporate bonds empowers investors to make informed decisions. Bonds can complement other investments and cater to investors of different ages, providing stability and potential growth for a secure financial future.
Frequently Asked Questions
How do corporate bonds pay interest?
Corporate bonds pay interest through a floating rate, fixed-rate or at maturity or by allowing conversion to common stock.
What are the maturities of corporate bonds?
Maturities range from 1 to 10 years and up.
Are corporate bonds right for you?
The decision to invest in corporate bonds depends on individual goals and risk tolerance. While they offer higher yields, they also carry higher risk. Factors such as the creditworthiness of the company and investment time horizon should be considered. Consulting with a financial advisor is recommended to assess if corporate bonds fit with investment objectives and financial plans.