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Corporate bond
 
 
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A Corporate Bond is a bond
Bond (finance)

In finance, a bond is a debt security , in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed Maturity ....
 issued by a corporation
Corporation

A corporation is a legal entity separate from the persons that form it. It is a legal entity owned by individual stockholders. In British tradition it is the term designating a body corporate, where it can be either a corporation sole or a corporation aggregate ....
. It is a bond that a corporation issues to raise money in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.)

Sometimes, the term "corporate bonds" is used to include all bonds except those issued by government
Government

Government is the body within any organization that has the authority to make and the power to enforce laws, regulations, or rules. Typically, the government refers to a civil government -- local, provincial, or national -- but commercial, academic, religious, or other formal organizations are also administered by governing bodies....
s in their own currencies.






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A Corporate Bond is a bond
Bond (finance)

In finance, a bond is a debt security , in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed Maturity ....
 issued by a corporation
Corporation

A corporation is a legal entity separate from the persons that form it. It is a legal entity owned by individual stockholders. In British tradition it is the term designating a body corporate, where it can be either a corporation sole or a corporation aggregate ....
. It is a bond that a corporation issues to raise money in order to expand its business. The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.)

Sometimes, the term "corporate bonds" is used to include all bonds except those issued by government
Government

Government is the body within any organization that has the authority to make and the power to enforce laws, regulations, or rules. Typically, the government refers to a civil government -- local, provincial, or national -- but commercial, academic, religious, or other formal organizations are also administered by governing bodies....
s in their own currencies. Strictly speaking, however, it only applies to those issued by corporations. The bonds of local authorities and supranational organizations do not fit in either category.

Corporate bonds are often listed on major exchanges
Stock exchange

A stock exchange, securities exchange or bourse is a corporation or mutual organization which provides "trading" facilities for stock brokers and trader s, to trade stocks and other security ....
 (bonds there are called "listed" bonds) and ECNs
Electronic Communication Network

An electronic communication network is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges....
 like MarketAxess, and the coupon
Coupon (bond)

File:Mecca_Temple_Coupons.jpgThe coupon or coupon rate of a bond is the amount of interest paid per year expressed as a percentage of the face value of the bond....
 (i.e. interest
Interest

Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money , or, money earned by deposited funds .Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft finance, and even entire factories in finance lease arrangements....
 payment) is usually tax
Tax

To tax is to impose a financial charge or other levy upon an individual or Legal person by a state or the functional equivalent of a state.Taxes are also imposed by many subnational entity....
able. Sometimes this coupon can be zero with a high redemption value. However, despite being listed on exchanges, the vast majority of trading volume in corporate bonds in most developed markets takes place in decentralized, dealer-based, over-the-counter
Over-the-counter (finance)

'Over-the-counter' trading is to trade financial instruments such as stocks, Bond , commodity or derivative directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading , such as futures exchanges or stock exchanges....
 markets.

Some corporate bonds have an embedded call option
Call option

A call option is a financial contract between two parties, the buyer and the seller of this type of Option . It is the option to buy shares of stock at a specified time in the future.Often it is simply labeled a "call"....
 that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible bond
Convertible bond

In finance, a convertible bond is a type of bond that can be converted into shares of stock in the issuing types of companies, usually at some pre-announced ratio....
s, allow investors to convert the bond into equity.

One can obtain an unfunded synthetic exposure to corporate bonds via credit default swap
Credit default swap

A credit default swap is a credit derivative contract between two counterparty. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument default ....
s.

Types

Corporate debt falls into several broad categories:
  • secured debt vs unsecured debt
    Unsecured debt

    In finance, unsecured debt refers to any type of debt or general obligation that is not Collateral by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation....
  • senior debt vs subordinated debt
    Subordinated debt

    In finance, subordinated debt is debt which ranks after other debts should a company fall into receivership or be closed.Such debt is referred to as subordinate, because the debt providers have subordinate status in relationship to the normal debt....
Generally, the higher one's position in the company's capital structure
Capital structure

In finance, capital structure refers to the way a corporation finances its assets through some combination of stock, debt, or hybrid security. A firm's capital structure is then the composition or 'structure' of its liabilities....
, the stronger one's claims to the company's assets in the event of a default.

Risk analysis

Compared to government bond
Government bond

A government bond is a Bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds....
s, corporate bonds generally have a higher risk of default
Default (finance)

In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract....
. This risk depends, of course, upon the particular corporation issuing the bond, the current market conditions and governments to which the bond issuer is being compared and the rating of the company. Corporate bond holders are compensated for this risk by receiving a higher yield than government bonds.

Consequently, this default risk can be quantified using spread analysis, which seeks to determine the difference in yield between a given corporate bond and a risk-free treasury bond of the same maturity. Common statistics used include Z-spread
Z-Spread

The Z-spread of a bond is the number of basis points one needs to apply to a series of zero rates such that the present value of the bond, accounting for accrued interest, equals the sum of all future cashflows discounted using the adjusted zero rate....
 and option adjusted spread
Option adjusted spread

Option adjusted spread is the flat yield spread over the Treasury security yield curve required to discount a security payment to match its market price....
 (OAS).

Corporate bond indices

Corporate bond indices include the Barclays Corporate Bond Index, the Citigroup US Broad Investment Grade Credit Index, and the Dow Jones Corporate Bond Index.

External Resources