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How Do Corporate Bonds Work?

 

Companies issue bonds for a variety of reasons. This could be to fund capital expenditure or mergers or acquisitions. When a company prices a bond or issues a bond, that bond is usually issued a price close to a $100.

That is typically known as the face value. Whether parts of the bond that are known at the onset or issuance of a bond include the coupon, the rate of return, and also the maturity date of the bond.

Bonds typically have a coupon payment period of either quarterly or semi-annual every six months although some coupons can be paid on a monthly basis. Companies can issue bonds typically from anywhere from two years out to 30 years or even longer, but most of the bonds are usually issued in that five to ten year bracket.

The maturity date is when investors can expect to receive their principal back or their face value back on their bonds and that is typically a set period of time. Investors don’t have to hold bonds until maturity.

Bonds are tradable before the maturity date in the corporate bond market. The prices of the bonds as such can move up and down which means that investors can get either high or lower returns than were expected when they bought the bonds.

If an investor holds a bond to maturity and as long as the company remains solvent, the investor’s return should usually be positive. When the bond is redeemed at maturity date, the investor should expect to receive $100 per face value.

Warwick Blowes - Case Study

"Corporate bonds are a great defensive asset class and far more interesting than having money sitting in the bank."

- Warwick Blowes

View the case study

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