Corporate bonds are a risky but potentially lucrative investment that could see you turning your spare cash into real profit. Corporate bonds work in much the same way as government bonds do. Money is lent to the company for a set period of time, and the organization will pay interest on the cash borrowed as a reward for the investment.
The more financially unstable or low-reputation the company is, the higher the interest will be on the money you invest. As the risk of investment gets higher, so does the financial reward as the interest percentage increases. The downside to this system, however, is that the cash you invest could be lost if the company goes bust or bankrupt. If the company folds and ceases to exist then there is nothing to guarantee that your investment will be returned, leaving you without your invested money.
This is why careful consideration must be taken when thinking about investing in corporate bonds. If you are willing to take the risk, and trust the company that will be using your invested money temporarily, then you may reap the rewards as the capital is returned to you with a bumper amount of interest. It is best to think of a corporate bond as an IOU – the company borrows the money to use it when they need it the most, perhaps for a takeover or to stave off some debt, and the money is returned with a reward for the investment.
The corporate bond will have a fixed maturity date, at which point your investment will be returned to you. This maturity date will be in line with the company’s needs and can be negotiated at the time of investment. The interest rate will also be prearranged and fixed at the same rate for the duration of the lending period. This means you will be able to calculate the return on your investment. Some companies prefer to pay the interest on the investment in installments, giving you a smaller payment every six months (as an example), while others will arrange to give you all the interest at the end of the lending period. This is a big plus with this form of investment or saving though, as you are in control of the terms and conditions of the corporate bond, allowing you to tailor the terms to suit your best interests.
Better established companies may use corporate bonds as a way to raise a little extra cash for their latest business deal, but these organizations will often offer a lower rate of interest for the investment as the risk is not high and the chances of your money being returned are excellent. Many companies pride themselves on their excellent track record in this respect. Your investment will depend entirely on how much you want to invest, and how great a risk you would like to take with the spare cash you have.
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