Bond Basics

• When you purchase a corporate bond, you are actually making a loan to the company. Unlike stocks you do not have ownership of the company. In return for your loan you will receive periodic payments from the company over the life of the bond. This is the interest or "coupon rate" which is being paid to you. At the end of the bond term, the "maturity date" you will receive the balance due to you. For example, if you purchase a $1,000 bond at 5 percent for 5 years, you would receive $50 per year for 5 years at which point you would collect $1,000.
  
  

Hierarchy

• Bonds hold a higher place in the financial chain than stocks. If a company defaults or goes through the bankruptcy process, the bond holders are due their money before the stock holders. This is because the bond holders are technically the lenders, while a stock holder is technically a fractional owner of the company.
  
  

Floating Bond Rates

• Many corporate bonds are issued with something called a "floating bond rate." A floating bond rate means that the interest a bond will pay the investor may fluctuate over time. A corporation will do this to safeguard against a sharp rise in interest rates for other debt they are borrowing. In this way they are insulated if they end up paying more or less than they originally anticipated. If you purchase a corporate bond, be sure to know if it is a floating bond.
  
  

Term

• When speaking of corporate bonds there are short, medium and long term bond investments. A short term bond is generally characterized as a bond with a maturity date of up to five years, a medium bond investment has maturity date between five and twelve years and a long term bond investment has a maturity date of over twelve years.
  
  

Ratings

• Every corporate bond has an associated bond rating. Think of the bond rating as a report card for that company. The better the grade, the better the overall financial health of the company. Typically, bonds with higher ratings pay lower interest because they are more secure. Bonds with lower ratings pay higher interest because they want to entice investors even though their bonds are considered riskier. There are two main bond rating agencies, Moody's and S and P. Each bond rating agency awards a "triple A" for the highest level, while Moody's offers a C for the lowest level and S and P offers a D. Also, a plus or minus symbol may be associated with the rating as a half-step for their grade.