Corporate debt securities give you a special
combination of advantages. These advantages include the following:
·
Generally higher interest rates than those of other
fixed-income instruments, like certificates of deposit and U.S. Treasury
securities.
·
A dependable source of attractive income, paid either
monthly or semiannually, that you can spend for current expenses or reinvest
for future needs.
·
Relative protection of principal, subject to credit
quality, assuming you hold the securities until maturity.
·
Diversity of choice among issuers, maturity dates and
quality ratings, increasing your flexibility to meet a broad range of
investment objectives.
You may find
corporate debt securities particularly attractive if you're investing through a
tax-deferred account, such as an Individual Retirement Account (IRA) or a
business retirement account.
Corporate debt
securities are usually issued in $1,000 face or par amounts. Each security is,
in effect, an IOU. It represents the issuer's promise to repay the loan face
amount, with interest, in a stated period of time. As an investor in corporate
debt securities, you are a creditor of the issuing company. You must be paid
any principal and interest due before stockholders receive any dividends.
Because corporate debt securities rank ahead of common stock, they are called
senior securities.
Corporate debt
securities may be issued by corporations in all areas of business, such as
public utilities, industrial companies, finance companies, banks and
transportation companies.
Corporate debt
securities are referred to as fixed-income securities because they usually pay
a fixed rate of interest, known as the coupon rate. The overwhelming majority
of bonds pay interest semiannually, while medium-term notes may pay interest
either monthly or semiannually.
The three most
significant characteristics of a corporate debt security are the following:
·
Quality
-- A determination of the issuer's creditworthiness.
·
Maturity
-- How long you have to wait before the issuer repays principal to you.
·
Yield
-- The return you expect to receive on the money you invest.
Corporate debt
securities include bonds, the conventional type of corporate debt security, and
medium-term notes. The primary difference between the two is that medium-term
notes can be offered continuously through a "shelf registration,"
that is, they can be offered without the costly, time-consuming process
required for a formal underwriting of bonds.
Medium-term notes are
generally issued by companies designated as "investment-grade"
companies by the nationally recognized statistical rating agencies. The ease of
shelf registration procedures provides them with a cost-effective means of
offering securities on a regular basis, and it increases their ability to
tailor maturity dates, interest payment frequency and other terms to suit
investor needs. The broad appeal of medium-term notes is demonstrated by the
fact that investment-grade corporations today issue almost as many medium-term
notes as conventional bonds.
New issues are
announced daily in the corporate debt securities market, providing you with
ongoing opportunities and a high degree of flexibility to meet virtually all
investment strategies. On any business day, you can select from a variety of
issues that may suit your portfolio criteria.
Different strategies are
implemented for different investment objectives. Typical investment objectives
include capital preservation, capital appreciation and current income.
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