What are corporate bonds?
Companies issue corporate bonds to raise capital for activities such as expanding operations, purchasing new equipment, or building new facilities. The issuing company is responsible for making interest payments and repaying the principal at maturity. Corporate bonds are senior to stock, so interest and principal must be paid before dividends are paid to stockholders.
What does Schwab offer?
- Selection of more than 9,000 corporate bond choices1
- Sophisticated online search and screener tools
- Guidance from Schwab Fixed Income Specialists
- Competitive, straightforward pricing
Why would Schwab recommend corporate bonds?
Corporate bonds typically have higher yields than those of similar fixed income investments, such as Treasuries and CDs. They can also provide a steady, predictable income, have a range of diversification choices, and are relatively easy to buy and sell in the secondary market.
What does Schwab charge to trade corporate bonds?
New-issue corporate bonds
While there are no markups on new-issue bonds, Schwab receives a selling concession for distributing the security to Schwab customers.
Secondary market corporate bonds
Markup of $1 per bond ($10 minimum, $250 maximum per trade)
Online price + $25 per trade*
*Schwab uses the same pricing schedule for sell orders, which must be placed through a broker and are subject to a $25 broker-assisted fee.
Take a closer look at the benefits.
Potential for higher returns
Corporate bonds can offer higher yields than those offered by other fixed income securities with similar maturities, but they have more risks. If you’re able to accept the higher risk that comes with this investment, corporate bonds could potentially enhance the overall return of your fixed income portfolio.
Corporate bond prices generally behave differently from stocks, so they can offer diversification benefits to a portfolio. The wide selection of corporate bonds also makes it possible to diversify by issuer, industry, maturity, credit ratings, and interest payment schedule.
Many corporate bonds are actively traded in the secondary market, which allows access to principal prior to maturity. Some bonds trade more actively than others, and those that don’t trade as often may be more difficult to sell. Investors may receive more or less than the original investment. By examining total issuance and trading history, investors can evaluate the liquidity of a particular bond.
Consider investing a minimum of $100,000 in at least 10 different issuers to be diversified in corporate bonds.
Review the risks.
In addition to the risks commonly associated with bonds, such as interest rate, credit, call, liquidity, reinvestment, inflation (or purchasing power), and market and event risks, the following characteristics should be considered when making decisions about corporate bonds.
Corporate bonds generally have lower credit ratings—and higher credit risk—than those of U.S. government bonds. Most corporate bonds are only guaranteed by the company that issues them, and the credit quality of corporate issuers varies greatly, with ratings ranging from AAA to C or lower. If the issuing company is financially unable to make interest and principal payments, the investor’s investment may be at risk.
Subordinated vs. unsubordinated bonds
Bonds from a single issuer are ranked in order of priority of payment in the event of a bankruptcy. Senior debt, which is paid first, may have a higher credit rating and higher credit quality than junior, or subordinated, debt.
Secured vs. unsecured bonds
Corporate bonds can be secured or unsecured obligations of the issuing company. Most issues are unsecured and backed only by the company’s promise to honor its commitments.
Secured bonds include a pledge of assets or revenue backing any bond payments. If the issuer is unable to make bond payments, this collateral may be used to pay back bondholders. Secured bonds generally have lower credit risk and lower coupon payments compared to unsecured bonds issued by the same corporate issuer.
Find corporate bonds.
Schwab makes it easier for you to narrow your choices and find the corporate bonds that are right for your portfolio. Schwab BondSource® gives you access to thousands of bonds, all in one place.
Take advantage of resources to help you make decisions.
Talk to a specialist
Get assistance from over 100 Schwab Fixed Income Specialists, who draw on an average of over 21 years of experience.2
Do the research
Access commentary that provides you with greater insight.
Attend a workshop
Learn more through educational workshops at your local Schwab branch.
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1. As of December 2015.
2. As of January 2016.
Schwab reserves the right to act as principal on any bond transaction. In secondary market principal transactions, the price will be subject to our standard markup in the case of purchases and a markdown in the case of sales, and also may include a profit to Schwab in the form of a bid-ask spread.
When trading as principal, Schwab may also be holding the security in its own account prior to selling it to you and, therefore, may make (or lose) money depending on whether the price of the security has risen or fallen while Schwab has held it.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.
This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.