Final answer:
Corporate bonds are typically long-term investments with semi-annual coupon payments and an expected return that compensates for the associated risk. The return includes a risk premium, reflecting the higher risk compared to government bonds, such as the Treasury bonds. The yield of corporate bonds can fluctuate based on the issuer's financial stability and market conditions.
Step-by-step explanation:
Corporate Bonds as Investments
Corporate bonds are typically considered long-term investments. They are debt securities issued by corporations to fund capital improvements, expansions, and other business activities. Coupon payments, which are interest payments to the bondholder, are usually made semi-annually, although the frequency can vary. The expected return on these bonds is typically higher than government securities like Treasury bonds due to the additional risk involved.
The riskiness of a corporate bond is often assessed by independent rating agencies such as Moody's, which provide ratings on the likelihood that a company will fulfill its debt obligations. An AAA rating indicates a relatively safe borrower, which may attract investors despite the inherent risks. Corporates are considered riskier than government bonds, as their yields rise and fall due to changes in the market and the issuing company's financial status.
An investment's interest rate can be broken down into compensation for delaying consumption, an adjustment for inflation, and a risk premium that accounts for the borrower's financial stability. For corporate bonds, the risk premium is an important component, as it compensates investors for the additional risk taken on in comparison to less risky investments.