A corporate bond (commonly known as a blue chip stock) is considered extremely safe and secure with little to no chance of default. However, what exactly is a corporate bond and why are they so popular? Let’s take a quick look.
What is a Corporate Bond?
A corporate bond is basically a debt obligation of a corporation (typically a large company). The company (usually termed the “borrower”) sells securities (typically shares or bonds) to investors. In return for the loan from the investor, the company promises to pay back a certain amount of money with a specified interest rate. If the company defaults on its loan obligation, the investor (known as the “creditor”) can proceed against the company to collect the debt.
Why Are They Popular?
One major advantage of investing in corporate bonds is that you can usually move the stock or bond around in your portfolio without affecting your original investment. This provides you with more flexibility than most investment vehicles. For instance, if the bond’s price suddenly increases, you can just sell it back to the issuer at the higher price.
Another advantage of investing in corporate bonds is that they provide you with steady income that you can reinvest in other bonds or stocks. This is in contrast with most other investment vehicles, which usually only provide shareholders with dividends or capital appreciation. As the name implies, the income from corporate bonds is fairly stable. However, it should be noted that this type of investment will probably not generate huge earnings. The reason behind this is simple. Companies that issue corporate bonds are usually well established with enough assets to pay back the debt. So, even though these companies may have grown tremendously in value over the past few years, they will still have to pay back their debts and continue operating as a businesses.
How to Value a Corporate Bond
When you buy a corporate bond, you usually also purchase “conversion stock” or “exchangeable bonds.” The former is simply the equivalent number of shares of the company’s stock that you are purchasing. The latter is a bond that can be converted into shares of the company’s stock at any time. For example, if you purchase a bond that is worth $100,000, the issuer of the bond will mail you 100,000 shares of stock, valued at $100,000, on the date the bond is due.
The value of a corporate bond is based on many factors. These include the creditworthiness of the company, the current interest rate, and the expected future performance of the company. Typically, the value of a corporate bond will range from 95 to 110% of its face value. This means that if you buy a $100,000 bond, you will be purchasing a share of stock that is worth $95,000 to $110,000.
The Dangers of Investing in Corporate Bonds
One of the major risks associated with investing in corporate bonds is that you may lose money. In other words, it is not guaranteed that you will profit from this type of investment. This is mainly because companies can go bankrupt and individuals can lose their assets if they are not repaid in full. Furthermore, if a company issues more debt in order to pay back its existing debt, then it may not have sufficient cash on hand to pay its bills. This could lead to a sudden drop in the value of its stock or bonds. In the event of this happening, you could end up losing a significant amount of money. This is why it is generally considered a very poor investment choice – especially considering the potential losses associated with this type of investment.
What About Mutual Funds and Exchange-Traded Funds?
Mutual funds and exchange-traded funds are also considered forms of “paper currency” due to their popularity in the market. As with most other types of paper currency, the value of a mutual fund or an exchange-traded fund can drop as stocks and bonds fluctuate in price. However, as these are professionally managed investment vehicles, this price fluctuation usually does not present a problem for the fund’s shareholders. This is because the fund manager takes into consideration many factors when valuing each stock and bond. He or she will consider the current interest rate, the company’s credit rating, the industry of the company, and many other things. As a result, the price of the stock or bond usually correlates fairly closely to its value. For this reason, most people consider mutual funds and exchange-traded funds to be relatively safe and stable ways to invest in the market.
Overall, corporate bonds are fairly safe and secure forms of investment. However, as with all types of paper currency, there is still the possibility of losses if the value of the paper currency drops. For this reason, it is best to avoid this type of investment if you are trading or investing in other countries. When investing or trading in your own country, it is usually best to invest in mutual funds or exchange-traded funds. The reason behind this is that individual bonds usually do not provide you with much in the way of security or stability. For instance, if you lose your job and cannot pay back your debts, you could end up having to sell your assets, including your house, to settle your debt. In most situations, individual bonds are considered a more risky investment option.