Corporate Bonds

If you buy a bond issued by a corporation such as General Electric or The Home Depot, and the bond pays 5% interest, each bond kicks out $50 of interest income to the owner each year. At the end of the term, the investor receives $1,000 per bond. We hope. See, sometimes corporations get into trouble and can’t pay the interest or—even worse—can’t repay the $1,000 of principal owed on each bond. They turn to the bankruptcy courts, and bondholders will be lucky to receive even a few dollars for the bonds that were supposed to be worth $1,000 at maturity. Doesn’t happen every day, but this risk of a default has to be considered when buying a corporate bond. Investors accept low yields on government-guaranteed US Treasury securities, but they demand higher yields on corporate bonds because of the risk of default.