From the course: Understanding Capital Markets

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Three important relationships in bonds

Three important relationships in bonds

From the course: Understanding Capital Markets

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Three important relationships in bonds

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- [Instructor] One common type of bond that investors buy are corporate bonds. Corporate bonds are issued by corporations, by companies, and they generally pay a higher rate of return than the alternatives, like municipal bonds, issued by municipalities, or Treasury bonds, issued by the US government. The safety or riskiness of corporate bonds varies a little more than munis and Treasury bonds, though. Companies go out of business more often than cities do, after all. Some corporate bonds, called junk bonds, carry very high rate of return, comparable to the return on stocks at around 10 to 12%. But they can default on average 10% or more of the time, because the companies issuing those bonds are riskier. They're at greater risk of going out of business. In contrast, safer corporate bonds carry a lower rate of return, averaging maybe six to 8%, depending on the time period. But they default less often than junk bonds, maybe averaging around two to 3% over time. Now, there are three…

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