Pros and cons of Corporate bonds investment - Make Money Online

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Pros and cons of Corporate bonds investment


 

What are corporate bonds?

When business houses want to fund their business, they have two options. The first option is to use owners fund the second option is to raise debt. One of the instruments to raise debt is to issue a bond. A company offers to return the principal amount with interest while issuing a bond to the public. The public invests a particular amount in a bond for a fixed duration against payment of interest on the principal amount.

Corporate bonds provide higher returns of interest in comparison to other bonds. However, the degree of risk associated with corporate bonds is also higher than other bonds. It is not considered safe to invest in corporate bonds. Corporate bonds are most like to default if the economy gets into recession cycle. However, there are certain advantages to investing in corporate bonds.

What are the advantages?

There are few certain advantages of investing a corporate bond such as

Higher return

The purpose any investment is to yield good returns in future. Corporate bonds are an ideal medium of investment for anyone who is looking for higher returns for his investments. The high return on investment is the reason they make a prime place in the portfolios of the top investors of the world.

Easy to sell

Majority of companies list their bonds to be traded in the secondary market. Market exchanges make it easy for any investor to sell his bond in the secondary market based on live bond prices. Such a facility is not available with government bonds. At the same time, facility of being able to draw their money at a given point of time is a big attraction among investors towards corporate bonds.

Protection against inflation

Corporate bond prices are less susceptible from the effect of inflation. The reason for such a less vulnerability to inflation is the high-interest rate as well the shorter redemption periods they offer.

What are the disadvantages?

Well there are certain advantages of buying corporate bonds such as

High risk

Bonds are not backed against assets of any kind. They are just a mere promise of returning the money depending on the future financial condition of the entity. There is always a high risk of default.

Do not provide capital gains.

Corporate bonds are not the ideal instrument for investment to provide high capital returns. These bonds are issued for a shorter period. Moreover, the life of the bond is depended on the financial performance of the company that is backing it up. An investor gets a small amount as due interest along with the principal money.

Can turn to zero

The whole principal amount of investment can convert into a financial loss in case the company is facing economic downtime. The return is entirely dependent on the financial health of the company. Not only the interest or coupons can default, but the whole principle amount can also be lost.
Pros and cons of Corporate bonds investment Pros and cons of Corporate bonds investment Reviewed by RAWAT on 2:47 AM Rating: 5