Where Can I Find Company Bonds? A Comprehensive Guide for Investors

Understanding where to find and invest in company bonds is a crucial step for diversifying your investment portfolio and potentially generating steady income. Company bonds, also known as corporate bonds, are debt instruments issued by corporations to raise capital for various purposes, from expanding operations to funding projects. Unlike government bonds, which are issued by national or municipal entities, company bonds are directly linked to the financial health and stability of the issuing corporation. This guide will explore where you can find company bonds, how to navigate the process, and what factors to consider before investing.

Understanding Company Bonds

Before diving into where to find company bonds, it’s essential to understand what they are and why they might be a valuable addition to your investment strategy.

What are Corporate Bonds?

Corporate bonds are essentially loans you make to a company. When you buy a corporate bond, you are lending money to the corporation in exchange for regular interest payments over a specified period, and the return of your principal at the bond’s maturity date.

Debt Security: A corporate bond is a type of debt security, representing borrowed money that the company is obligated to repay.
Issuer: The issuer is the corporation borrowing the money. Companies like Apple, Microsoft, or smaller businesses can issue bonds.
Bondholder: You, as the investor who purchases the bond, become a bondholder, or creditor, of the corporation.
Coupon Rate (or Coupon): This is the interest rate the company promises to pay on the bond’s face value. Payments are typically made semi-annually. For example, a bond with a 5% coupon rate and a $1,000 face value will pay $50 per year, usually in two $25 installments.
Maturity Date: This is the date when the company must repay the face value (principal) of the bond to the bondholder. Corporate bonds can have varying maturity dates, ranging from a few years to several decades.

Why Invest in Corporate Bonds?

Investing in corporate bonds can offer several benefits:

Diversification: Corporate bonds can diversify your portfolio beyond stocks. Bonds and stocks often react differently to market conditions, potentially reducing overall portfolio volatility. Diversification is a key strategy to manage risk.
Potential for Steady Income: Corporate bonds typically pay a fixed coupon, providing a predictable income stream, especially attractive for income-seeking investors.
Higher Yields Compared to Government Bonds: Generally, corporate bonds offer higher yields than government bonds because they carry a higher degree of risk. This higher potential return compensates investors for the increased credit risk associated with lending to a company versus a government.
Priority Over Stockholders in Bankruptcy: In the event of a company’s bankruptcy, bondholders have a higher claim on the company’s assets than stockholders. This means bondholders are more likely to recover some of their investment compared to stockholders if the company faces financial distress.

Where to Find and Buy Company Bonds

Now, let’s address the core question: “Where Can I Find Company Bonds?” Here are the primary avenues for purchasing corporate bonds:

1. Online Brokerage Platforms

The most accessible and convenient way for individual investors to buy corporate bonds is through online brokerage platforms. These platforms provide access to the secondary market, where previously issued bonds are traded between investors.

Accessibility and Convenience: Online brokers offer user-friendly interfaces, research tools, and the ability to buy and sell bonds from your computer or mobile device.
Wide Selection: These platforms typically offer a wide selection of corporate bonds with varying maturities, coupon rates, and credit ratings.
Transparency and Information: Reputable online brokers provide bond information, including bond ratings, current yield, yield to maturity (YTM), and other relevant data to help you make informed decisions.
Lower Commissions: Online brokers generally have lower commission fees compared to full-service brokers, making bond investing more cost-effective for smaller investors.

Popular Online Brokers: Many well-known online brokers facilitate bond trading. Some popular options include:

Fidelity: Known for its research tools and broad selection of fixed-income products, including corporate bonds.
Charles Schwab: Offers a robust bond platform with extensive research and educational resources.
TD Ameritrade (now part of Schwab): Provides a user-friendly platform and access to a wide range of bonds.
*ETRADE (now part of Morgan Stanley):** Offers a solid platform for bond trading with competitive pricing.

How to Buy Bonds on an Online Brokerage Platform:

Open an Account: If you don’t already have one, you’ll need to open a brokerage account.
Fund Your Account: Deposit funds into your account via electronic transfer, check, or wire.
Navigate to the Bond Section: Most platforms have a dedicated section for bonds or fixed income.
Search for Corporate Bonds: You can search by issuer, credit rating, maturity, coupon rate, or yield.
Research and Analyze: Review the bond’s details, including its bond rating (from agencies like Moody’s or Standard & Poor’s), yield, maturity date, and issuer information. Understand the prospectus if available.
Place Your Order: Once you’ve chosen a bond, you can place a buy order. Bonds are typically quoted as a percentage of par value (usually $1,000). Be aware of the markup or markdown charged by the broker.
Monitor Your Investment: After purchasing, you can track your bond’s performance and interest payments through your brokerage account.

2. Full-Service Brokers

Full-service brokerage firms offer personalized advice and services, which can be beneficial, especially for investors new to bond investing or those with complex financial situations.

Personalized Advice: Full-service brokers provide guidance from financial advisors who can help you select bonds that align with your investment goals and risk tolerance.
Comprehensive Financial Planning: They often offer broader financial planning services beyond just bond investing.
Access to a Wider Range of Bonds: Full-service brokers may have access to a broader inventory of bonds, including new issues in the primary market, and may be able to source bonds that are not readily available on online platforms.

Consider Full-Service Brokers if:

You prefer personalized investment advice.
You need help developing a comprehensive financial plan.
You are interested in primary market bond offerings.
You are comfortable with higher commission fees for personalized service.

3. Directly from Issuing Companies (Less Common for Individuals)

While less common for individual retail investors, it is theoretically possible to purchase bonds directly from the issuing company, especially in the primary market when new bonds are initially offered.

Primary Market Access: Large institutional investors often participate directly in the primary market. Sometimes, individual investors can access new issues through a broker who is part of the underwriting syndicate.
Higher Minimum Investments: Direct purchases, particularly in the primary market, often require significant minimum investments, making it less accessible for typical retail investors.
Complexity: Navigating the primary market and dealing directly with bond issuers can be complex and requires a deep understanding of bond markets and issuance processes.

Generally, purchasing corporate bonds through online brokerage platforms or full-service brokers is the most practical and accessible route for individual investors.

Factors to Consider When Choosing Company Bonds

Before investing in corporate bonds, consider these key factors:

1. Credit Ratings

Bond ratings are crucial indicators of a bond’s creditworthiness and the issuer’s ability to meet its debt obligations. Ratings are assigned by credit rating agencies like Moody’s, Standard & Poor’s, and Fitch.

Investment-Grade Bonds: Bonds rated BBB- or higher by Standard & Poor’s or Baa3 or higher by Moody’s are considered investment-grade. These bonds are deemed to have a relatively low risk of default.
High-Yield Bonds (Junk Bonds): Bonds rated BB+ or lower by Standard & Poor’s or Ba1 or lower by Moody’s are considered non-investment-grade or high-yield bonds, often referred to as “junk bonds.” These bonds carry a higher credit risk but offer potentially higher yields to compensate for that risk.
Importance of Due Diligence: While bond ratings are helpful, always conduct your own research and understand the financial health of the issuing company.

2. Maturity Dates

The maturity date is the date when the bond principal is repaid. Corporate bonds come with various maturities:

Short-Term Bonds: Mature in 1-5 years. Less sensitive to interest rate changes but may offer lower yields.
Medium-Term Bonds: Mature in 5-10 years. Offer a balance between yield and interest rate sensitivity.
Long-Term Bonds: Mature in 10+ years. Generally offer higher yields but are more sensitive to interest rate fluctuations and inflation.

Choose maturity dates that align with your investment timeline and interest rate outlook.

3. Yield and Interest Rates

Coupon Yield: The fixed interest rate stated on the bond when issued.
Current Yield: The annual interest payment divided by the bond’s current market price. This reflects the bond’s yield based on its current price, which can fluctuate in the secondary market.
Yield to Maturity (YTM): The total return anticipated on a bond if it is held until it matures. YTM considers the bond’s current market price, par value, coupon rate, and time to maturity. It’s a more comprehensive measure of return than current yield.
Interest Rate Risk: Bond prices move inversely to interest rates. When interest rates rise, bond prices typically fall, and vice versa. Longer-term bonds are more susceptible to interest rate risk.

4. Call Provisions

Some corporate bonds are callable bonds, meaning the issuer has the right to redeem the bonds before the maturity date at a predetermined price (the call price).

Call Protection: Some callable bonds offer call protection, meaning they cannot be called for a certain initial period.
Prepayment Risk: Call provisions introduce prepayment risk. If interest rates fall, issuers may call bonds to refinance their debt at lower rates, which can be unfavorable for bondholders as they may have to reinvest at lower yields.
Yield to Call (YTC): If you are considering a callable bond, look at the yield to call (YTC) in addition to YTM. YTC calculates the return if the bond is called on its earliest possible call date.

Risks Associated with Company Bonds

While corporate bonds can be a valuable asset, it’s crucial to be aware of the risks:

Credit Risk (Default Risk): The risk that the issuing company may default on its interest or principal payments. Credit risk is higher for non-investment-grade bonds. Always assess bond ratings and the issuer’s financial health.
Interest Rate Risk: As mentioned, bond prices can decline when interest rates rise. This risk is more pronounced for longer-term bonds.
Inflation Risk: Inflation erodes the purchasing power of fixed income payments. If inflation rises unexpectedly, the real rate of return on your bonds may decrease. Consider Treasury Inflation-Protected Securities (TIPS) for inflation protection, although these are government bonds, not corporate bonds.
Liquidity Risk: Some corporate bonds, especially those from smaller or less well-known companies, may have lower liquidity, making them harder to sell quickly at a fair price in the secondary market. Liquidity is generally higher for bonds issued by large, well-established corporations.
Call Risk: As discussed, issuers may call bonds, potentially forcing investors to reinvest at lower rates.

Conclusion

Finding and investing in company bonds can be a strategic move to diversify your portfolio and generate income. Online brokerage platforms provide the most accessible and convenient way for individual investors to participate in the corporate bond market. By understanding the different avenues for purchase, key factors like credit ratings and maturity dates, and the associated risks, you can make informed decisions and potentially enhance your investment returns. Remember to conduct thorough research, consider your risk tolerance and investment goals, and potentially consult with a financial advisor to determine if corporate bonds are the right fit for your overall investment strategy.