Corporate Bonds

Overview

Corporate bonds are debt securities issued by companies to raise capital for operations, growth, capital improvements, acquisitions, or to refinance other debt. When you buy a corporate bond, you lend money to the issuer in exchange for periodic interest payments (coupons) and repayment of the principal (face value) at the bond’s maturity.

Key takeaways

Corporate bonds typically pay higher yields than government bonds because they carry greater credit risk.
Bonds are commonly issued in $1,000 par-value increments and often pay interest semi‑annually.
Credit rating agencies (S&P, Moody’s, Fitch) assess issuer creditworthiness; lower-rated bonds (high-yield or “junk”) offer higher yields to compensate for higher default risk.
Corporate bonds are not FDIC insured.
Investors can buy individual bonds or get exposure through mutual funds and ETFs.

How corporate bonds work

Issuance: Corporations typically work with investment banks to underwrite and market a bond offering. Bonds are issued with a stated coupon rate (fixed or floating) and maturity date.
Payments: Coupon payments are usually semi‑annual, though some bonds pay monthly, quarterly, or annually.
Maturity and principal repayment: At maturity the issuer repays the bond’s face value (par). If sold before maturity, a bond’s market price may be above or below par depending on interest rates and credit perceptions.
Secondary market: Most corporate bonds trade over‑the‑counter (OTC). Liquidity varies by issuer, credit quality, and market conditions.

Credit ratings and risk

Credit rating agencies evaluate the issuer’s ability to meet interest and principal payments. Highest quality bonds are often called “AAA”; the lowest investment-grade ratings sit above high‑yield or “junk” status.
Ratings influence borrowing costs: higher-rated issuers pay lower coupons, while lower-rated issuers must offer higher yields.
Types of credit-related bonds:
High‑yield (junk) bonds: higher default risk and higher yield.
Income bonds: sometimes issued by distressed companies and may not require regular coupon payments.
Secured bonds: backed by specified assets; unsecured (debentures) are not.
Convertible bonds: can be converted into equity under specified terms.

Features that affect investors

Call provisions: Some bonds can be called (redeemed early) by the issuer—often when interest rates fall—reducing future interest income for bondholders.
Fixed vs. floating rate: Fixed-rate bonds have a set coupon; floating-rate bonds reset with a reference index.
Credit events: Downgrades or defaults materially affect price and yield.
Priority in bankruptcy: Bondholders and other creditors are paid before equity shareholders.

Why companies issue bonds

Debt financing allows companies to raise capital without diluting ownership.
Bonds can be cheaper than equity and give issuers flexibility in structuring maturities and covenants.
Short-term corporate financing needs can also be met with commercial paper, which matures in 270 days or less.

Role in a portfolio

Bonds are commonly used to reduce overall portfolio volatility and provide income.
Investors typically increase bond allocations as they approach retirement or need steadier cash flows.
Combining corporate bonds with government and municipal bonds can balance yield and credit exposure.

Comparisons and common questions

Corporate bonds vs. stocks: Bonds are loans that pay interest and return principal at maturity; stocks represent ownership and offer capital appreciation and dividends. In insolvency, bondholders rank above shareholders.
Corporate bonds vs. Treasury bonds: Treasuries are backed by the U.S. government and carry lower credit risk, so they generally offer lower yields than corporate bonds.
Are corporate bonds FDIC insured? No—corporate bonds are investment securities, not bank deposits, and are not FDIC insured.
Do corporate bonds pay monthly? Most pay semi‑annually, but payment schedules vary by issue.

Bottom line

Corporate bonds provide companies with a way to raise capital without issuing equity and give investors a source of income with typically higher yields than government debt. They carry issuer‑specific credit risk, are influenced by interest rates and ratings, and suit investors seeking income and diversification while accepting the risk that the issuer might default.