Corporate Bonds -- Leveling up to become THE Rich Grandma

Corporate bonds are basically government bonds but leveled and chiseled up. But for those who didn’t read my previous post about government bonds side eye, government bonds are just an IOU but help fund government projects. Let’s learn about the golden IOU for whom I bet even Chimpanzini Bananini uses. 

So a corporate bond in its official definition is “debt securities issued by a corporation in order to raise money for their business and improvements” OR in other words I pay the corporation some money to help them out and they owe me and have to pay interest on it. 

Let’s do an example! 

Corporation: Okay…so we need $100. Can anyone lend us $100??????

Me: Yes! I got you buddy. But what’s the interest rate?

Corporation: We can pay $5 per month with interest of $2 annually. 

Me: UGH, math. But 100/5 = 20, so 20 months or 1 year and 8 months and when they pay me 

back I’ll make $103 – hmm not bad. YOU GOT A DEAL.

End of example. Please note: most corporate bonds start at $1000, just something to keep in mind

Although interest rates may be as little as 2%, corporate bonds tend to be paid for at 8-10 years, so that interest ADDS UP QUICKLY. There is a set deadline to which the bond MUST be paid including all the interest rates as well. 

High-quality (not sketchy) corporate bonds are considered a relatively safe and conservative investment. So most investors use it to offset their more riskier investments. As you grow older, it is recommended you retire into more bonds for a fixed income. HOWEVER, corporate bonds are still more riskier than government bonds. If the issuer goes out of business, you may never be paid the promised interest or even principal (starting amount). Governments don’t have this problem as they can just raise taxes to meet their debts. 

But with high risk comes high reward. Corporate bonds tend to have higher interest rates due to the higher risk associated with them. Just for your expansive vocabulary, “Triple A” bonds are corporate bonds that are of highest quality and lowest risk, while the least creditworthy (most sus) are termed “junk”. (Yeah…that makes sense.)

Follow these steps to invest in corporate bonds!!: 

• Online Options: Fidelity, Forex, Betterment 

• Check your bank provider to see if they offer!

• Choose bonds based on interest, risk, and principal amount (do note that brokers may take a percentage – so make sure to check!) 

• Buy it off the website/app :) 

One more thing I need to mention, the U.S does have a rating agency that will determine the creditworthiness of corporate bonds. These ratings have a HUGE affect on interest rates and bond pricing so do your research to find which risk you are willing to take.

Corporate bonds are risky, but if you play it right you can have all the cookies in the cookie jar. Stay tuned for the FINALE of Rich Grandma!!

Sources:

https://www.investopedia.com/terms/c/corporatebond.asp

https://www.investopedia.com/financial-edge/0612/how-to-invest-in-corporate-bonds.aspx