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Buying a bond is basically extending a loan to a “borrower.” With corporate bonds, a company is borrowing money (usually a minimum of $5,000 and going up in increments of $1,000 from there). Like a loan, a corporate bond usually has a fixed interest rate, so you'll receive set payments from the company, typically twice a year. The length of the loan can vary from one year up to 40, and at the end of that time period, the company pays you back the original face value of the loan.
Corporate bonds are considered a fixed-income type of investment. It's called fixed income because these kinds of investments are designed to pay investors a steady income.
Those payments can be used one of two ways:
Your financial advisor can help you find the right investment mix of stocks and bonds for your portfolio. It's based on your financial goals, risk tolerance and time horizon.
Just like when you apply for a personal loan, a corporation has a credit rating that can help the “lender” – you – decide whether or not to issue the loan. The company's financial standing – its earnings and debts, the structure of its industry and the outlook for future profitability – determines its ability to make those regular payments.
Bond credit ratings look a lot like a school report card. Ranging from AAA to D, the more As, the better. Generally, anything rated between AAA and BBB- is considered “investment grade,” although different ratings agencies have slightly different rating notations. Ratings are simply the rating company's opinion of whether or not the bond's issuer will be able to meet its ongoing obligations. These ratings are just estimates and shouldn't be considered an indication of future performance. You should use other factors along with credit rating information when deciding whether to buy a bond.
The bond market can be just as unpredictable as the stock market. At Edward Jones, we don't try to forecast exact interest rate movements. Instead, we use a strategy called “bond laddering” to prepare for potentially rising rates. Laddering means staggering the maturity dates of your fixed-income investments to own an appropriate mix of short-, intermediate- and long-term bonds.
Your corporate bond income will stay the same as long as you own the bond, but your bonds' market value will vary. Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices go down. The risk of this lowering of bond values as a result of rising rates is called "interest rate risk." Edward Jones has a very large inventory of corporate bonds, so your financial advisor can help you find bonds with varying maturities as you build your ladder. This will help you avoid playing guessing games with interest rates, and you'll have a more diversified portfolio, which helps lower your interest rate risk.
You must evaluate whether a bond or CD ladder and the securities held within it are consistent with your investment objectives, risk tolerance and financial circumstances.