What Are Corporate Bonds? 5 Things to Know Before Investing

If you’re looking for an investment with steady returns and a low risk of capital losses, you might want to check out corporate bonds. These are bonds or debt obligations issued by corporations to raise capital. In simpler terms, when you invest in corporate bonds, you are essentially lending money to the company; in return, that company pays you a fixed interest over a set period.

While corporate bonds generally offer less volatility than stocks, they still carry risks of their own. To better understand how they can work with your investment strategy, let’s walk through what corporate bonds are and explore several points to help you evaluate whether they fit your personal finance goals.

How Corporate Bonds Work

Corporate bonds are financial instruments created by companies that need funding for long-term projects or business expansion. When a corporation issues one of these bonds, it is agreeing to borrow money from investors and repay the capital at maturity. As a fixed-income investment, corporate bonds allow investors to collect interest at regular intervals, helping establish a reliable stream of cash flow. At the end of the bond’s term, the issuing company pays back the investor’s principal.

This structure can make it easier for investors to project future returns. However, investors must understand the maturity date, the interest rate, and the issuer’s financial standing because these factors influence the bond’s overall reliability. With this information, investors can better judge whether a particular bond aligns with their comfort level.

Why Corporate Bonds Appeal to Some Investors

Many individuals appreciate corporate bonds because they help create steadier progress toward long-term financial goals. For one, scheduled interest payments can feel reassuring, particularly for people who are gradually building investment income. This can make corporate bonds a straightforward choice for investors who want to reduce uncertainty in their portfolios.

Additionally, lower price fluctuations can give investors a sense of stability. Although the value of a corporate bond can still move with changes in interest rates and market conditions, it generally behaves more predictably than stock prices. This gives investors peace of mind during periods when other parts of the market feel unsettled. Moreover, corporate bonds can be an accessible investment, especially for those who are just building their portfolio. At EastWest, you can invest a minimum of PHP 20,000 face value for peso-denominated corporate bonds, depending on the issuing corporation’s requirements. This lowers the barrier to entry for Filipinos who might not yet have the resources for bigger capital but want to start investing. 

Risks to Consider With Corporate Bonds

Even though corporate bonds may carry less volatility than some investments, they are not without risk. For instance, a company might lose its ability to meet its financial obligations, which could affect the interest investors receive. Similarly, changes in broader economic conditions can influence how comfortable investors feel holding a given bond.

Another factor to keep in mind is how sensitive these bonds are to changing interest rates. When rates rise, bond prices often fall, which can affect the value of your investment if you plan to sell before maturity. It’s important to understand this dynamic so that you feel prepared for how your bond may behave over time.

How Credit Ratings Influence Corporate Bonds

Credit ratings can guide investors in choosing corporate bonds by helping them understand how secure a bond might be. Independent rating agencies review a company’s financial strength and then issue a grade that reflects the company’s ability to meet its obligations and compensate its investors. This can give investors a sense of how much risk they may be taking on.

Investors typically rely on these ratings when comparing bonds. Higher-rated bonds, known as investment-grade bonds, often appeal to those who want more certainty in their investments. On the other hand, lower-rated bonds, also called junk bonds, can be tempting because they offer higher interest, but they require careful evaluation of the issuing company’s financial condition.

Corporate Bonds in a Personal Portfolio

Corporate bonds can play an important role in supporting long-term financial planning. Many investors use them to help stabilize their portfolios when other investments fluctuate. Also, the consistent interest payments they offer can make corporate bonds a helpful source of income during different life stages.

Furthermore, while bonds alone may not offer rapid growth, they can support a measured strategy that balances risk and return by providing stability that can complement other investments. 

For investors looking for relative stability and steady income, corporate bonds can be a good pick. While generally lower risk compared to other investments, corporate bonds are also subject to interest rate fluctuations and economic factors that can affect their performance and yield. As such, it’s crucial to evaluate not only the potential of these fixed-income investments but also their vulnerabilities so they can build an investment strategy that maintains stability and protects their capital for the long term. 

Ready to invest in corporate bonds? Get in touch with EastWest today for your questions and concerns regarding our range of banking products.