What is a corporate bond?

Corporate bonds typically pay a higher yield than US Treasurys

A corporate bond is a type of security issued by a firm and sold to an investor. The company receives the money it needs in exchange for promising to make a series of interest payments over a set amount of time. The corporation pays a fixed or floating interest rate each period and returns the investor’s original investment at maturity.

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The interest rate a company pays depends on the creditworthiness of a corporation, which is determined by at least one of the three major U.S. credit-rating agencies – Standard and Poor’s Global Ratings, Moody’s Investor Services and Fitch Ratings.

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Top-rated companies are given an  AAA-rating while investment-grade companies, or those considered to be non-speculative, are rated BBB- or higher at Standard and Poor’s.

Junk-rated companies, or below BBB- at S&P, pay a higher yield because they are considered to be riskier investments and have a higher chance of being defaulted on.

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Corporate bonds are considered riskier investments than Treasurys, which are backed by the full faith and credit of the U.S. government, and therefore typically pay a higher yield.

Although there have been some instances where corporate bond yields have fallen below that of similar dated U.S. Treasurys.

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