How to Buy Corporate Bonds

Contributor, Benzinga

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Luckily, your investment options are 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. So, with that, here’s (yet another) avenue to consider: Why not add corporate bonds to your portfolio? Learning how to buy corporate bonds can help both you and your business diversify.

Best Corporate Bonds Right Now

As you shop around, you want to get it right the first time around. Check out Benzinga’s top picks for best corporate bond funds.

1. Vanguard Long-Term Corporate Bond ETF

You can always 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 you up to 0.70%. The ETFs 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 offers showy returns over 5%. Its top holdings include Altice France SA, Sprint Corp., Transdigm Inc. and Ford Motor Company. 

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, fund research and development, pay shareholder dividends or refinance debt. They are one of the largest sectors of the U.S. bond market, which also include U.S. Treasury bonds, other types of government bonds and municipal bonds.

If you’ve read through the bond classifications, read through the nuances of risk 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:

  1. 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 has narrowed down the best online brokerage to buy corporate bonds. You can take a look at our full rankings for the best online brokerages or take a quick look at our favorites below.

  2. Narrow Your Bond Choices

    Research sector, growth and performance and use Benzinga’s Best Bond Funds article to choose the right option for you. Even if you already know how to buy corporate bonds, you need to consider your options carefully.

  3. 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 — 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.

  4. 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. 

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Bond Classification

Bonds can be classified in several different ways, including by their maturity, interest payment offerings and credit quality.

Maturity

Bonds all have different maturity rates, and longer-term bonds often offer larger 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

Interest Payments

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.

Credit Quality

Bonds all 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 most likely be paid on time if you invest in an investment-grade bond over a non-investment grade bond. On the other hand, 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, are a good way to preserve principal and at the same time, provide yourself with a steady income. They offer you the ability to invest in a variety of sectors, and unlike CDs, are a little bit more flexible (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 all 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.

Frequently Asked Questions

Q

How do corporate bonds pay interest?

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How do corporate bonds pay interest?
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A
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Corporate bonds pay interest through a floating rate, fixed-rate, at maturity, or you can convert it into common stock.

answered
Q

What are the maturities of corporate bonds?

1
What are the maturities of corporate bonds?
asked
A
1

The maturities range from 1 to 10 years and up.

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