FAQs About Corporate Bonds - Negligence and Misrepresentation

If you believe that you have lost money in the purchase or sale of corporate bonds, contact the law office of Russell L. Forkey for your initial free consultation.

Corporate Bonds:

There are many types of bonds that investors have to choose from.  These include individual municipal bonds, mutual fund bond funds, corporate bonds, asset backed securities and other types of secured and unsecured bonds.  When considering what type of bond investment would be appropriate for you, as an investor, you should consider the characteristics of each of these investments, including risk before making your final investment decision. Information is your friend and assists in your understanding of the investment that you are making.

This post is limited to a general discussion relating to corporate bonds.  It is being provided for informational purposes only and is not designed as legal or investment advice nor is it designed to answer all questions that you might have relative to such an investment.  Conversely, it important to consult with a financial professional in this regard.

What is a corporate bond?

Corporate bonds, like other investments, are nothing more than contracts between borrowers (the issuer) and the bondholder (the lender), wherein the borrower promises the lender a specified rate of return, with repayment of principal at maturity.

What is the attraction of corporate bonds?

The attraction of corporate bonds is a higher yield compared to government bonds. Whether the corporate bond is secured (usually a mortgage bond) or unsecured (sometimes called a debenture), the bond has a superior claim on the earnings of a company then that of an equity investment such as common stock.  Upon liquidation of the company, bond holders, depending on the terms of the bond indenture, have higher levels of payment than equity investors.

What factors influence the price of bonds, especially in the secondary market?

The minimum par or face value of a corporate bond is usually $1,000. However, bonds do not necessarily sell at par value. This is particularly true in the secondary bond market. In the secondary market, bonds are traded at discounts or premiums relative to their face value in order to bring their stated interest rates in line with market rates. Normally, the price movement of a bond is inverse to interest rate movements thereby creating a degree of market risk. For example, when market interest rates rise, there is a decline in the price of a bond with a lower fixed interest rate.

Bond prices also vary depending how much time exists before maturity. This is because of the time value of money and because time involves risk and risk means higher yield. Bond yields thus normally decrease (and prices increase) as bond approaches maturity.

The safety and value of corporate bonds are also related to credit risk, quite simply the ability of the borrower to pay interest and principal when due. Yields are also affected by the relative financial strength of the borrower, as reflected in the regularly updated ratings assigned to bonds by the major rating services.

Finally, other considerations influencing the price of corporate bonds are such things as whether or not the bonds have a call feature, call protection features, sinking funds and other factors or combinations thereof to numerous to mention, including various economic considerations.

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