The following is provided for information purposes, and not meant to be legal or financial advice.
Corporate bonds are debt instruments issued by corporations for capital. As an alternative to issuing stock, the corporation repays the loan at a specific future date and makes interest payments to the investor at a fixed rate. The income is dependable as compared to stocks.
Bonds are senior to stock. Interest and principal are paid to bondholders before dividends to stockholders. Corporate bonds offer higher yields than treasury bonds. Usually bonds with higher yields have lower credit ratings. Some bonds are callable. Callable bonds limit the investor's ability to lock in a high yield for the full term until maturity. When an investor holds the bond until maturity, the issuer promises to pay the full face value.
Corporate bonds are liquid. If an investor needs cash, the investor may sell the bonds any time prior to maturity in the secondary market. When a bond is actively traded, it is easier to sell. Bond prices and interest move in opposite directions.
Municipal bonds are debt securities issued by state and local governments and agencies. Unlike corporate bonds, the interest on municipal bonds may be free from federal and state taxes.
Treasuries are debt securities of the US government issued through the Department of Treasury. The US government guarantees timely interest and principal payments. Treasuries are the benchmark for corporate bonds.
Another security usually compared with the corporate bonds is the Bond Unit Investment Trusts are fixed portfolios of professionally selected tax-exempt or taxable bonds. The bonds remain in a portfolio for the life of the trust. The investor receives the principal as the bonds in the trust mature or are called.
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