If you can accept a higher risk in exchange for a potentially higher yield, corporate bonds may be right for your portfolio.
Corporate bonds can help in diversifying a portfolio and generally have a predictable payment structure.
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Companies issue corporate bonds to raise capital for activities such as expanding operations, purchasing new equipment, or building new facilities. The issuing company is responsible for making interest payments and repaying the principal at maturity. Corporate bonds are senior to stock, so interest and principal must be paid before dividends are paid to stockholders.
What does Schwab offer?
Why would Schwab recommend corporate bonds?
New-issue corporate bonds
While there are no transaction fees on new-issue bonds, Schwab receives a selling concession for distributing the security to Schwab customers.
Secondary market corporate bonds
Transaction fee of $1 per bond ($10 minimum, $250 maximum per trade*)
Online price + $25 per trade
*Schwab reserves the right to act as principal on any fixed income transaction, public offering or securities transaction. When Schwab acts as principal, the bond price includes our transaction fee (outlined above) and may also include a markup that reflects the bid-ask spread and is not subject to a minimum or maximum. When trading as principal, Schwab may also be holding the security in its own account prior to selling it to you and, therefore, may make (or lose) money depending on whether the price of the security has risen or fallen while Schwab has held it. When Schwab acts as agent, a commission will be charged on the transaction.
Take a closer look at the benefits.
Potential for higher returns
Corporate bonds can offer higher yields than those offered by other fixed income securities with similar maturities, but they have more risks. If you’re able to accept the higher risk that comes with this investment, corporate bonds could potentially enhance the overall return of your fixed income portfolio.
Many corporate bonds are actively traded in the secondary market, which allows access to principal prior to maturity. Some bonds trade more actively than others, and those that don’t trade as often may be more difficult to sell. Investors may receive more or less than the original investment. By examining total issuance and trading history, investors can evaluate the liquidity of a particular bond.
Corporate bond prices generally behave differently from stocks, so they can offer diversification benefits to a portfolio. The wide selection of corporate bonds also makes it possible to diversify by issuer, industry, maturity, credit ratings, and interest payment schedule.
Consider investing a minimum of $100,000 in at least 10 different issuers to be diversified in corporate bonds.
In addition to the risks commonly associated with bonds, such as interest rate, credit, call, liquidity, reinvestment, inflation (or purchasing power), and market and event risks, the following characteristics should be considered when making decisions about corporate bonds.
Corporate bonds generally have lower credit ratings—and higher credit risk—than those of U.S. government bonds. Most corporate bonds are only guaranteed by the company that issues them, and the credit quality of corporate issuers varies greatly, with ratings ranging from AAA to C or lower. If the issuing company is financially unable to make interest and principal payments, the investor’s investment may be at risk.
Subordinated vs. unsubordinated bonds
Bonds from a single issuer are ranked in order of priority of payment in the event of a bankruptcy. Senior debt, which is paid first, may have a higher credit rating and higher credit quality than junior, or subordinated, debt.
Secured vs. unsecured bonds
Corporate bonds can be secured or unsecured obligations of the issuing company. Most issues are unsecured and backed only by the company’s promise to honor its commitments.
Secured bonds include a pledge of assets or revenue backing any bond payments. If the issuer is unable to make bond payments, this collateral may be used to pay back bondholders. Secured bonds generally have lower credit risk and lower coupon payments compared to unsecured bonds issued by the same corporate issuer.
If a bond issuer repays the principal (calls) of the bond before its stated maturity date, the investor could miss out on future interest income payments.
If the credit rating of the corporate bond changes to a lower rating, the value of the bond may decrease. This can occur if the issuer defaults.
If interest rates rise, the market value of the bond may decline, which could be a risk to the investor trying to sell before the maturity date.
If interest rates are low and a bond reaches its maturity date or the issuer calls the bond, the investor could be left with a lower yielding reinvestment option and possible reduction in cash flow.
Inflation (purchasing power)
If prices rise at a higher rate than investment returns, then money buys less in the future. The risk is greatest if the bond has a long time before its maturity.
Market and event
Outside situations that influence the market could have a negative impact on the price or value of your investment.
The relative ability of a security to be sold without substantial transaction costs or reduction of value. The harder it is to sell a security or the greater the loss in value resulting from a sale, the greater the liquidity risk.
Find corporate bonds.
Schwab makes it easier for you to narrow your choices and find the corporate bonds that are right for your portfolio. Schwab BondSource® gives you access to thousands of bonds, all in one place.
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