A bond is a security, which obliges the issuer of the bond to make regular coupon payments to its investors as well as to repay the received amount at maturity. Bonds can be issued by governments, municipalities as well as corporations.
In essence, bondholder gives a company, municipality or state a loan, a loan that pools together many investors on identical terms. Similarly to other creditors, the bondholder aims to earn interest on the loan and get back principal payments by previously agreed deadlines according to the terms of the bond. Generally, regular interest is paid on bonds, but the invested principal is paid back to the investor on the bond redemption date. A bond interest rate may be fixed or floating. Usually, the contract foresees the investor receiving regular interest payments, ordinarily several times a year, throughout the period until the bonds are redeemed.
Reasons to invest
Predictable cash flows on investment as well as relative stability of value – bond value is not nearly as volatile as stock.
Risks to consider
Investing in corporate bonds carries several risks, including:
Credit risk: The issuing company may default on its debt obligations, potentially leading to a loss of some or all of the invested capital.
Interest rate risk: Changes in interest rates can impact the value of corporate bonds. If interest rates rise, the value of existing bonds with lower interest rates may decrease.
Market risk: The value of corporate bonds can be impacted by broader market conditions, such as changes in economic conditions, investor sentiment, and global events.
Liquidity risk: It may be difficult to sell corporate bonds quickly in times of market turmoil or in the event of a personal emergency, limiting an investor’s ability to access their invested funds in a timely manner.
Reinvestment risk: The interest payments received from corporate bonds may need to be reinvested in a low-interest rate environment, potentially leading to reduced future returns.
It’s important to consider these risks when making investment decisions and to research the creditworthiness and financial stability of the issuing company before investing. It’s also recommended to diversify your bond portfolio by investing in a range of companies and industries to reduce overall risk exposure.
Public vs private
Both public and private bond issues are available for investment. However, private deals have considerably lower liquidity and a more narrow range of investors.