Benefits

Like most debt securities, the main benefit of corporate debt (such as bonds) is interest income. While there are exceptions - such as certain commercial paper issues that are zero-coupon - most corporate bonds pay interest to investors semiannually.

Corporate bonds can also provide capital appreciation, especially when market interest rates fall (bond prices and interest rates generally move in opposite directions). However, interest rate movements are hard to predict, and bonds ultimately mature at par value. For that reason, most corporate bond investors don’t buy these securities expecting capital gains. One important exception is convertible bondholders: if the issuer’s common stock price rises significantly, the conversion feature can create an opportunity for capital gains.

Among the three major issuer categories (corporate, municipal, and U.S. government), corporate debt is generally the riskiest. Companies can and do go bankrupt. In fact, 70% of small businesses fail within their first decade. Because of this credit risk, corporate bonds typically offer higher yields than bonds with stronger backing. In general, the less established the company, the higher the yield investors may demand.

If an issuer defaults, bondholders have higher priority than stockholders in a liquidation. Corporate bonds may also be structured to reduce risk - for example, they can be secured or guaranteed.

The corporate debt market also offers a wide range of choices. An investor might choose a relatively low-risk, low-yield security, such as the lowest-ever yielding 3-year Amazon note. Or, a more aggressive investor might accept higher risk in exchange for higher potential yield by buying a high-yield (junk) bond from a start-up or distressed company. This range of risk and return profiles is a key feature of corporate debt.