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Corporate bond

A corporate bond is an interest bearing or discounted debt security issued by a corporation. Corporate bonds are essentially loans by the investor to the issuing company in return for interest payments. They are fixed income securities.


Expanded Definition

Corporate bonds are classifed by their bond rating and their maturity. Bond ratings are assigned by bond rating agencies including firms such as Standard and Poor's, Moody's, and Fitch. Several rating systems are used, but the most common one ranges from AAA for the safest to C- for the least secure. Investment grade bonds are rated from AAA to BBB-. BB+ and below bonds are considered junk bonds.

Bond maturity is the date on which a bond expires. A bond is a contract to pay interest at a specified rate, i.e. the coupon, and on specified dates until the maturity date. At maturity, the issuer agrees to refund the face value of the bond.

Bond are classified by maturity as short, usually under about two years, and long, usually over about 15 years. In between are intermediate bonds. Prices of short bonds respond quickly to changes in interest rates and especially actions by the Federal Reserve Board. Long bonds tend to respond more slowly. However, the yield curve of US Treasury bonds is the reference point.

Changes in interest rates cause the market value of bonds to change. Rises in interest rates cause bond prices to fall so the bond, which pays a fixed amount of interest, pays market interest rates to the buyer. Conversely, falling interest rates can cause the market value of a bond to increase, making possible a sale for capital gains.

Bond yield changes with market conditions and can be different from the coupon yield when the market price of the bond is other than the face value.

Zero coupon bonds are bonds paying no interest. They are sold at a deep discount and then pay face value at maturity.

Bonds are bought and sold by bond traders or by the bond desk of your broker. Although some bonds are listed on major exchanges, most are traded over the counter. Most individual investors find it necessary to hold bonds to maturity as the resale market is limited. Bonds can be sold but usually at the price offered by the bond desk of your broker. Bid ask spreads are said to be wide.

Asset backed securities or trust preferred issues are a new class of bonds. They are listed and traded on major stock exchanges as preferred stocks. Each issue is backed by a single corporate bond. Hence, these are in effect corporate bonds traded on major stock exchanges and available at discount broker commissions.

Many bonds are callable. The issuer may call the bond at a specified price on or after a specified date. The details are listed in the prospectus for the issue. QuantumOnline [1] does an excellent job of summarizing call provisions. They also provide links to the original prospectus for the issue. (But the bond ratings shown may not be up to date.)

Those considering purchase of a bond should reseach call provisions. Bond yields are often supported by the call price. Paying a premium over the call price can result in having the bond called out from under you at a loss. Hence, bonds near or after their call date often have their market value held down by the call price. That can cause them to show up in bond listings as remarkably high yielding bonds. Be especially careful of bonds paying above market yields.

Compare: government bond, municipal bond

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