Benefits

Like all other debt securities, the primary benefit of corporate debt (like bonds) is interest income. While there are some exceptions for securities like commercial paper that are zero coupon, most corporate bonds pay semi-annual interest to investors.

Capital appreciation could occur with any debt security, especially when interest rates fall. However, interest rate fluctuations are difficult to predict and bonds ultimately mature at par. Most corporate debt investors do not expect capital gains from their securities. However, this is an added benefit provided to convertible bondholders if the issuer’s common stock price rises considerably.

Of the three major issuers (corporate, municipal, and US Government), corporate debt is the riskiest. Companies go through bankruptcy every year. In fact, 70% of small businesses fail within their first decade. While this isn’t the case for every business, corporate debt typically comes with higher yields due to the risk involved. The less proven the company, the higher yield an investor can expect.

Even if something goes wrong and the issuer defaults, bondholders have higher priority than stockholders during a liquidation. Additionally, corporate bonds could be secured or guaranteed, helping the investor avoid risk.

There’s a wide variety of options available to investors seeking corporate debt. One could invest in the lowest-ever yielding 3-year Amazon note, which presents little risk and return. Or, an aggressive and risk-tolerant investor could take their chances with a high-yielding junk bond from a start-up or distressed company. Variety and choices are important to investors, and the corporate debt market certainly offers them.