Definition: Bonds are debt obligations issued by entities, such as corporations or governments. Corporate bonds are debt obligations issued by corporations for the purpose of raising capital for corporate projects and other means of expanding the issuing corporation.
When you purchase a corporate bond, you are lending money to a corporation, which in turn promises to pay you a specified amount of interest until the stated maturity date, at which time the original amount of the bond you purchased (the principal) is returned to you, the investor.
Corporate bond funds are simply mutual funds that invest in corporate bonds. It is important to note the difference between bonds and bond mutual funds. Individual bonds are typically held by the bond investor until maturity. The investor receives interest (fixed income) for a specified period of time, such as 5 years, 10 years, 20 years or even 30 years. The price of the bond may fluctuate while the investor holds the bond but the investor can receive 100% of his or her initial investment (the principal) at the time of maturity. Therefore there is no "loss" of principal as long as the investor holds the bond until maturity (and the issuing corporation does not default by bankruptcy).
This is not the same as how bond mutual funds work. With bond mutual funds, the investor does receive the interest paid by the underlying bond securities held in the mutual fund. However the investor is still exposed to the risk of falling prices because the net asset value (NAV) of mutual funds reflect the prices of the underlying securities (holdings) held within the mutual fund.
See Also: Municipal Bonds, Junk Bonds and US Treasury Bonds
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
