Corporate Bonds

Corporate bonds are issued when a company needs to raise money to finance its business operations or, oftentimes, an expansion into new directions. In the bond-investing world, they stake out a comfortable middle ground: Their yields, or rates of return, are higher than ultrasafe Treasurys but lower than risky junk bonds.

These types of bond have received investment-grade status based on their bond ratings from the major rating agencies, Standard & Poor's and Moody's Investors Services. (Investment-grade status means the corporate bonds received at least a triple-B rating from one or both of the agencies.)

While not as airtight as Treasurys, which are backed by the government, investment-grade corporate debt is usually pretty insulated from the risk of default. But strange things can happen. Back in the spring of 2005, the corporate bond market was roiled when auto giants GM (GM Quote) and Ford (F Quote) got downgraded to "junk" status because of underfunded pensions and rising health care costs. So nothing is truly safe.

Big note: Corporate bonds, unlike lower-yielding municipal bonds (and Treasurys, which aren't taxed at the state level), are fully taxable. So that means each time you receive an interest payment, you'll owe Uncle Sam a piece.

To buy into a corporate bond offering directly, you have to go through a broker and pay commission fees. But it's very difficult to know whether you're getting a fair price. You also can invest in bond funds that specialize in corporate bond issues.

Even if as an investor you choose not to invest in corporate debt, it's an area worth paying attention to. If you are a stock investor, an important facet of a company's financial health is the amount of debt it assumes and its ability to pay it off.

Going Corporate