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Corporate bond
A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to fund ongoing operations, mergers & acquisitions, or to expand business. It is a longer-term debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under specific terms. Corporate debt instruments with maturity shorter than one year are referred to as commercial paper.
A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to fund ongoing operations, mergers & acquisitions, or to expand business. The term sometimes also encompasses bonds issued by supranational organizations (such as the European Bank for Reconstruction and Development). Strictly speaking, however, it only applies to those issued by corporations. The bonds of local authorities (municipal bonds) are not included.
Corporate bonds trade in decentralized, dealer-based, over-the-counter markets. In over-the-counter trading, dealers act as intermediaries between buyers and sellers. Corporate bonds may be publicly listed (these are called "listed" bonds). However, the vast majority of trading volume happens over-the-counter.
Corporate bonds are divided into two main categories: high grade (also called investment grade) and high yield (also called non-investment grade, speculative grade, or junk bonds) according to their credit rating. Bonds rated AAA, AA, A, and BBB are high grade, while bonds rated BB and below are high yield. This is a significant distinction as high grade and high yield bonds are traded by different trading desks and held by different investors. For example, many pension funds and insurance companies are prohibited from holding more than a token amount of high yield bonds (by internal rules or government regulation). The distinction between high grade and high yield is also common to most corporate bond markets.
The coupon (i.e. interest payment) is usually taxable for the investor. It is tax deductible for the corporation paying it. For US dollar corporates, the coupon is almost always semiannual, while Euro denominated corporates pay coupon quarterly.
The coupon can be zero. In this case the bond, a zero-coupon bond, is sold at a discount (i.e. a $100 face value bond sold initially for $80). The investor benefits by paying $80, but collecting $100 at maturity. The $20 gain (ignoring the change in value of money over time) is in lieu of the regular coupon. However, this is rare for corporate bonds.
Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. These are called callable bonds. A less common feature is an embedded put option that allows investors to put the bond back to the issuer before its maturity date. These are called putable bonds. Both of these features are common to the high yield market. High grade bonds rarely have embedded options. A straight bond that is neither callable nor putable is called a bullet bond.
Other bonds, known as convertible bonds, allow investors to convert the bond into equity. They can also be secured or unsecured, senior or subordinated, and issued out of different parts of the company's capital structure.
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Corporate bond
A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to fund ongoing operations, mergers & acquisitions, or to expand business. It is a longer-term debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under specific terms. Corporate debt instruments with maturity shorter than one year are referred to as commercial paper.
A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to fund ongoing operations, mergers & acquisitions, or to expand business. The term sometimes also encompasses bonds issued by supranational organizations (such as the European Bank for Reconstruction and Development). Strictly speaking, however, it only applies to those issued by corporations. The bonds of local authorities (municipal bonds) are not included.
Corporate bonds trade in decentralized, dealer-based, over-the-counter markets. In over-the-counter trading, dealers act as intermediaries between buyers and sellers. Corporate bonds may be publicly listed (these are called "listed" bonds). However, the vast majority of trading volume happens over-the-counter.
Corporate bonds are divided into two main categories: high grade (also called investment grade) and high yield (also called non-investment grade, speculative grade, or junk bonds) according to their credit rating. Bonds rated AAA, AA, A, and BBB are high grade, while bonds rated BB and below are high yield. This is a significant distinction as high grade and high yield bonds are traded by different trading desks and held by different investors. For example, many pension funds and insurance companies are prohibited from holding more than a token amount of high yield bonds (by internal rules or government regulation). The distinction between high grade and high yield is also common to most corporate bond markets.
The coupon (i.e. interest payment) is usually taxable for the investor. It is tax deductible for the corporation paying it. For US dollar corporates, the coupon is almost always semiannual, while Euro denominated corporates pay coupon quarterly.
The coupon can be zero. In this case the bond, a zero-coupon bond, is sold at a discount (i.e. a $100 face value bond sold initially for $80). The investor benefits by paying $80, but collecting $100 at maturity. The $20 gain (ignoring the change in value of money over time) is in lieu of the regular coupon. However, this is rare for corporate bonds.
Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. These are called callable bonds. A less common feature is an embedded put option that allows investors to put the bond back to the issuer before its maturity date. These are called putable bonds. Both of these features are common to the high yield market. High grade bonds rarely have embedded options. A straight bond that is neither callable nor putable is called a bullet bond.
Other bonds, known as convertible bonds, allow investors to convert the bond into equity. They can also be secured or unsecured, senior or subordinated, and issued out of different parts of the company's capital structure.