Free Essay: Pros and Cons of Corporate Bonds
Corporate bonds popularly referred to as coupons are given to investors by corporations as cash investment. The investor gets the corporate bonds with the promise that the value will increase. With the increase of interest rates, the investor draws in income which he can enjoy once the period set elapses.
With the volatile global business environment, the corporate bonds became a very secure way to save up money. Many people consider corporate bonds a more secure option for saving up for retirement in comparison to other ways. However, corporate bonds have their advantages and disadvantages.
The Pros of corporate bonds
Corporate bonds have always paid at higher rates in comparison to other kinds of bonds including government bonds. Anyone planning to make money from bonds has a higher chance of accruing a high profit from corporate bonds than any other kind of bonds. This is one of the main reasons why most people are attracted to this kind of financial investment.
Another advantage of corporate bonds is that they are a more predictable source of income. When investing your money in any business there are obviously many risks that you have to face. Investing in corporate bonds is the least risky way to save up money and watch it grow. As long as the corporate bonds are not sold before the end of their term it is possible to accurately calculate whet your profit margins will be.
Most people are not aware that even when interest rates decline, corporate bonds can still be sold for a profit. Even when the national rates drop, the rates of the new corporate bonds are reduced. This is owed to the fact that this business is not about competing with each other but to find a reliable way to create financial resources.
The Cons of corporate bonds
One of the greatest downside of corporate bonds is that they are backed only by the company issuing them. This means that in the unfortunate event that the company goes down your money will go down with it. If the company issuing them goes out of business there is no legal recourse that can help the investors get back their money.
The stability of the company issuing the corporate bonds will determine whether the value of the bonds will go up or decline. When the company becomes unstable, the values of the corporate bonds become low. Some investors will decide at this time to sell out their coupons before the term set for the bonds elapses. This also has it risks because they may not get a lot of profit out of it.
Over a long period of term, the value of corporate bonds fluctuates. This is a risk with all kinds of bonds. Trying to sell your bond before the time is due is also not a good idea.
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