A Corporate Bond is a bond issued by a company. When a company wants to borrow money to pay for business expenses, such as building a factory or buying another company, instead of taking out a loan, it can sell bonds to investors.
Corporate bonds are a form of debt for the company. Because when it sells you a bond, it is borrowing money from you, and it has to pay you back at a later date.
The risk of a corporate bond depends on the quality of the Issuer. Each publically traded bond is assigned a Credit Rating. This rating indicates how likely or unlikely it is that the Issuer will be able to make payments on the bond.
There are over 20 different credit rating levels. And the lower the credit rating, the higher the risk the Issuer won’t pay you on the bond. But the higher potential reward too. This is because the riskier the Issuer, the higher the interest rate, or coupon, will be on the bond.
Corporate bonds are taxable at both the state and federal levels, which means you have to pay state and federal taxes on the coupons you receive.
Remember, when you buy a corporate bond you are loaning money to that company. So buy corporate bonds from companies you believe will succeed.