What is a Corporate Bond?
Corporate bonds are debt instruments created by companies for the purpose of raising capital. They are called fixed-income securities because they pay a specified amount of interest on a regular basis.
How Does a Corporate Bond Work?
The bond itself represents a loan agreement between the and the investor, and the terms of the bond obligate the to repay the borrowed amount (the principal) by a specific date (the maturity). Some bond are short-term (a year or less), others are intermediate-term (usually two to 10 years), and many are long-term (a period of 10 to 30 years or more). with of less than 10 years are typically called notes.
The face value, or , of a bond represents the amount to be repaid at maturity. Corporate bonds usually have $1,000 face values, meaning that the pays the holder $1,000 on the . Baby bonds have face values of $500. that the face value is not the of the bond.
Although maturity date, they do usually pay the investor a specific amount of interest on a semiannual basis. (In some cases, when the are serial bonds, specific principal amounts become due on specified dates.) The interest rate, or coupon rate, on a bond is the percentage of , or face value, that the pays the bondholder on an annual basis.don’t usually repay the principal until the
For example, you purchase a 5% bond (that is, a bond with a 5% coupon rate) from Company XYZ. Thehas a face value of $1,000. This means you receive $50 in interest payments per year ($1,000 x 0.05). Corporate usually make payments in six-month installments, meaning in our case that you would receive $25 in say, January, and the other $25 in June. The , the and the certificate all disclose the payment schedule.
Why Does a Corporate Bond Matter?
In the grand scheme of factors, including the income investor's tolerance for risk and horizon. Corporate are generally not safer than government , certificates of deposit, or most , because corporations are more likely to default on their obligations than the U.S. government, local governments and banks. The added risk means that corporate typically higher returns than these instruments.choices, corporate are relatively safe, , but of course this depends on several
Owning a company's debt is different in many ways from owning a company's stock. First, bondholders cannot vote and they are not entitled to dividends. Second, debt ranks senior to equity. This means that the bondholders are among the first in line to be repaid in the event the liquidates. Shareholders might receive some proceeds from the after this point, if there is anything left. So seniority provides an extra level of security for bondholders, and this is one reason corporate bonds are generally considered “safer” than stock.
Companies want to borrow as cheaply as possible, so they can get creative in how they structure their