Corporate bond

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A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. ^[1]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 governments 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.^{[clarification needed]}

Corporate bonds are often listed on major exchanges (bonds there are called "listed" bonds) and ECNs like MarketAxess, and the coupon (i.e. interest payment) is usually taxable. 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 markets.

Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible bonds, allow investors to convert the bond into equity.

One can obtain an unfunded synthetic exposure to corporate bonds via credit default swaps.

Types

Corporate debt falls into several broad categories:

• secured debt vs unsecured debt
• senior debt vs subordinated debt

Generally, the higher one's position in the company's capital structure, the stronger one's claims to the company's assets in the event of a default.

Risk analysis

Compared to government bonds, corporate bonds generally have a higher risk of default. 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 and option-adjusted spread (OAS). The new issue concession is used when valuing soon to be issued corporate bonds as it is the new bond's yield minus the yield of an existing bond from the same issuer for about the same maturity date.

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

References

1. ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 281. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.