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What are some of the main reasons why investors include corporate bonds within their portfolio?
Aside from the diversification strategy many investors employ, corporate bonds make up a portion of many investors' portfolios because they offer good yields when compared with same-maturity government bonds, and because of their predictable income while preserving capital. Additionally, since you can see the ratings of various corporate bonds, you may find the bonds with the best ratings that are likelier to repay principal and interest, allowing you to compare your various choices and risks. Additionally, corporate bonds can be sold before maturity to help an investor have more liquidity.
Where do corporate bonds trade?
Most corporate bond transactions trade "over the counter," meaning they are traded by bond dealers, brokers, and traders in many different locations. Some corporate bonds trade on established exchanges such as the NYSE/Euronext Exchange.
What types of companies issue corporate bonds?
The types of companies that issue corporate bonds are typically public utilities, transportation companies, large industrial companies, financial companies, and large conglomerate companies that may be involved in many industries and services, among many others.
How does the IRS treat the interest I receive on a corporate bond?
The interest you receive while you hold a corporate bond sold before it matures is subject to federal income taxes. As long as the bond is held up to a year from the time of purchase, it is taxed at your ordinary income tax rate. If it is held for longer than one year, it is taxed at the current long-term capital gains rate. If you sell a bond at a loss, you may use this loss to offset gains made by other investments. Depending on the size of the loss, you may deduct the loss during that reporting year, or carry over the loss to subsequent reporting years. For additional information, please consult a tax professional.
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