Investing in bonds has always carried an air of mystique. The terminology surrounding the assessment of credit risk, the calculation of yield and the classification of the security is often enough to discourage the average investor from wading into this investment opportunity.

Investment in corporate bonds, however, whether investment grade or high yield, offers an opportunity in the current market environment for an investor to earn current income and future price appreciation.

What is a Corporate Bond?

In the most fundamental sense, a corporate bond is nothing more than making a loan to a company.

Corporations need to raise capital for a variety of reasons, including growth, funding a leveraged buy-out and providing cash for operating expenses.

Capital can be raised by offering ownership opportunity to the investor (the sale of company stock), by issuing corporate bonds or convertible bonds or by securing bank loans.

An investor purchasing a corporate bond has leant money to the company just as a bank might.

The corporate bond market has become the largest of the three primary bond markets. With over $5 trillion in outstanding bonds, as of 2006, the corporate bond market exceeded the US Treasury market, with $4 trillion outstanding and the municipal market which stood at $1 trillion.

About 80% of currently outstanding corporate bonds are of investment grade quality with ratings of BBB- or better by Standards and Poor's, Baa2 or better by Moody's and BBB- by Fitch. The remaining 20% constitute the "high yield" or "junk" bond market.

About 20% of the outstanding corporate debt is considered to be in the high yield category. This is a substantial increase from 1992, when there was about $200 billion of high yield bonds held by investors.

Who Buys Corporate Bonds?

The vast majority, well over 90%, of corporate bonds are purchased at the time of initial offering by mutual funds, insurance companies and other institutional investors.

While individuals are typically not buyers in the initial offering…