Corporate bonds: What they are and how they work?
What are corporate bonds? : When the topic is bonds, the mind goes directly to BTPs or government bonds. But there is a parallel universe, often more profitable, made up of bonds issued by companies. These are called corporate bonds, and for many investors they represent the ideal balance point between the stability of fixed income and a return higher than that of government bonds.
What are corporate bonds
Corporate bonds (or corporate bond) are debt securities issued by private or public companies to raise capital. When you buy a corporate bond, you are essentially lending money to the issuing company. In return, the company commits to:
Pay you a periodic coupon (usually semiannual or annual) at a fixed or floating rate
Repay the nominal principal at the maturity of the security
The key difference versus BTPs is who borrows your money: instead of a state (generally considered more reliable), it’s a company, with all the risks that implies.
TYPES OF CORPORATE BONDS : Investment Grade vs High Yield
The world of Corporate Bonds is split into two main categories based on risk:
Investment Grade: bonds issued by companies with a high credit rating according to specialized agencies (S&P, Moody’s, Fitch). Rating from AAA to BBB. They are considered relatively safe, with a low insolvency risk. As a result, they offer more moderate yields.
High Yield (or Junk Bond): bonds issued by companies with a rating below BBB—more indebted companies, with less solid balance sheets or in cyclical sectors. The default risk is higher, but the returns offered are significantly higher to compensate the investor.
Choosing between the two families depends on your risk tolerance and the investment time horizon.
What are corporate bonds? : When the topic is bonds, the mind goes directly to BTPs or government bonds. But there is a parallel universe, often more profitable, made up of bonds issued by companies. These are called corporate bonds, and for many investors they represent the ideal balance point between the stability of fixed income and a return higher than that of government bonds.
What are corporate bonds
Corporate bonds (or corporate bond) are debt securities issued by private or public companies to raise capital. When you buy a corporate bond, you are essentially lending money to the issuing company. In return, the company commits to:
Pay you a periodic coupon (usually semiannual or annual) at a fixed or floating rate
Repay the nominal principal at the maturity of the security
The key difference versus BTPs is who borrows your money: instead of a state (generally considered more reliable), it’s a company, with all the risks that implies.
TYPES OF CORPORATE BONDS : Investment Grade vs High Yield
The world of Corporate Bonds is split into two main categories based on risk:
Investment Grade: bonds issued by companies with a high credit rating according to specialized agencies (S&P, Moody’s, Fitch). Rating from AAA to BBB. They are considered relatively safe, with a low insolvency risk. As a result, they offer more moderate yields.
High Yield (or Junk Bond): bonds issued by companies with a rating below BBB—more indebted companies, with less solid balance sheets or in cyclical sectors. The default risk is higher, but the returns offered are significantly higher to compensate the investor.
Choosing between the two families depends on your risk tolerance and the investment time horizon.
