Corporate bonds function like this – when businesses and corporations are looking for lenders. They don’t want to go public and sell their shares or parts of their company publicly, but they do need money to borrow. Mostly it’s when they can’t get money from banks they hire financial professionals to help with this public lending.
Corporations will borrow for a certain period of time and then pay a yearly interest rate on the loan until the bond matures.
This is considered the most risky of all bonds because you don’t know if the company will pay you back or they can fold. As with all higher risks, the rewards are much higher.
The company, government or municipality pays back in different time frames. This is called coupon rate or coupon yield.
Some can pay monthly, by-yearly, yearly or at the end of it’s maturity.
This information is known to the public when you purchase and you make the decision.
The risk is much lower, thus the rewards are lower. But if you buy well, you will always make your money back!
NOTE: There are minimums to when purchasing bonds. Each brokerage and financial institution has different policies. There usually aren’t any fees or commissions. Just find out about the minimum purchases and also the different time frames.
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