A corporate bond is a debt security issued by a company. Investors buy corporate bonds for the stability and consistency of interest payments. Basically, investors are lending the company money for a certain time period. Once a bond expires or reaches maturity, payments cease, and the investor’s capital is returned, which means the loan has been paid back. Interest payments are pre-determined and rates can be fixed or variable. A corporate bond’s interest rate is determined by the company’s creditworthiness. Companies with good credit (i.e., AAA) pay less interest because of the bond’s lower interest rate. Whereas those companies with poor credit (i.e., junk status) pay a high interest rate because they are considered risky.
