Understanding Corporate Bond Investments
What is a corporate bond?
A corporate bond is a debt obligation of a company to an investor (think of an IOU). Investors who buy corporate bonds are basically lending money to the company issuing the bond. In return, the company makes a legal commitment to pay interest on the principal and to return the principal when the bond comes due or matures.
A company generally needs to have consistent earnings potential to be able to offer debt securities to the public at a favourable coupon rate.
The difference between corporate bonds and stocks: When an investor purchases stocks, he essentially buys shares of the company. However, when an investor buys a corporate bond, he is only lending money to the company.
The value of stocks rises and falls with the value of the company, allowing the investors to earn profits but also subjecting the investors to losses. Alternatively, bonds earn interest rather than profits.
If in a worse case scenario, a company goes into bankruptcy, it pays its bondholders along with other creditors before its stockholders, making bonds arguably a safer investment when compared to stocks.
Sometimes corporate bonds are not only paid from the proposed or proven business model but are also secured by assets.
Real estate has always been seen as a safe and trusted asset and so corporate bonds that offer security in the form of real estate are obviously very favourable investments. Usually, the assets of the company will be held in a third party escrow or trustee structure.
Why invest in corporate bonds
This form of investment allows you to participate in more large-scale projects, and you do not need to become attached to a particular apartment, building or even a country. Also, investment amounts can often start from as low as 1,000 US dollars.
Such products are perfect for someone who is interested in hassle-free passive income, secured by a solid asset.
At the same time, this type of investment offers fairly high returns, especially considering the lower level of risk.
In our opinion, this is one of the best ways to invest in ‘real estate’ and is, of course, a great alternative to fixed-rate bank deposits.