Glossary
Corporate Bond
Debt issued by a company to raise money, paying interest and carrying more credit risk than government bonds of similar maturity.
A corporate bond is a loan that investors make to a company in exchange for regular interest payments and the return of the Principal on a set date. Companies issue them to fund factories, acquisitions, buybacks or simply to refinance older debt. Because a business can fail in a way the US Treasury is not expected to, corporate bonds pay more than Treasuries of the same maturity.
How a corporate bond works
Most are issued in $1,000 face-value units with a fixed Coupon, usually paid twice a year, and a Maturity anywhere from one to 30 years or more. They trade over the counter between dealers rather than on a stock exchange, so prices for smaller issues can be hard to see.
Credit quality
Agencies such as S&P, Moody's and Fitch grade issuers. Bonds rated BBB- (S&P/Fitch) or Baa3 (Moody's) and above are Investment grade; anything lower is high yield, or "junk". The lower the rating, the higher the yield investors demand. In a bankruptcy, bondholders rank ahead of shareholders, and secured bonds ahead of unsecured ones, but recoveries can still be well below face value.
Risks to weigh
- Credit Risk: the issuer may Default or be downgraded.
- Interest-rate risk: when market rates rise, existing bond prices fall.
- Call risk: many bonds let the issuer repay early when rates drop.
- Liquidity: small issues can trade rarely and at wide bid-ask spreads.