Investing in bonds can be an excellent way to earn some return with your capital while reducing the risk of capital losses. This is especially valuable as you get close to a financial goal, when stock market volatility can result in big — and fast — capital losses. And when it comes to earning the highest yields, corporate bonds often come out ahead of treasury bonds issued by the federal government and municipal bonds issued by state and local governments.
A corporate bond is a debt instrument issued by a business to raise money. Unlike a stock offering, with which investors buy a stake in the company itself, a bond is a loan with a fixed term and an interest yield that investors will earn. When it matures, or reaches the end of the term, the company repays the bond holder.
How corporate bonds work
A corporate bond is a loan to a company for a predetermined period. In return, the company agrees to pay interest (typically twice per year) and then repay the face value of the bond once it matures.
Let’s use a typical fixed-rate bond as an example. If you invest $1,000 in a 10-year bond paying 3% fixed interest, the company will pay $30 per year and give back your $1,000 in a decade.
While fixed-rate bonds are the most common, there are