Corporate Bonds

Corporate bonds, otherwise known as debt financing, serve as a major capital source for almost all businesses together with equity and lines of credit and bank loans. In general, a company needs constant earnings potential in order to offer debt securities to the public at a constructive coupon rate. When a company has a higher perceived credit quality, it becomes easier to issue debt at lower rates as well as issue higher amounts of debt.  

A corporate bond is usually applied to long-term debt instruments that generally mature within at least one year from the date of issue. Instruments with shorter maturity are sometimes called “commercial paper.”

Corporate bonds often include all bonds except those issued by governments in their own securities. However, it strictly refers to those issued by corporations, thus the term “corporate bond." Thus, bonds from other organizations and local authorities are not included in this category.

Although corporate bonds are listed on major exchanges, “listed” bonds and ECNs as well as the coupon or interest payment are generally taxable. Despite being listed on exchanges, the majority of volume trading in most developed markets of corporate bonds happens in dealer-based, over-the-counter, and decentralized markets.

How does a corporate bond work?

A debt security that is issued by a corporation is sold to investors and the backing of the bond is the company’s payment ability from earnings of future operations. In many cases, the physical assets of the company may be considered as collateral for bonds.

Issuance of corporate bonds is in blocks of $1,000 in par value with a standard payment structure of coupons. It is also common for corporate bonds to have call provisions allowing for early prepayment in case a change in prevailing rate occurs.