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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.
A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment
ability of the company, which is typically money to be earned from future operations. In some cases, the
company's physical assets may be used as collateral for bonds.
Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always
higher, even for top-flight credit quality companies.
Corporate bonds are issued in blocks of $1,000 in par value, and almost all have a standard coupon payment
structure. Corporate bonds may also have call provisions to allow for early prepayment if prevailing rates
change.
Corporate bonds, i.e. debt financing, are a major source of capital for many businesses along with equity and
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bank loans/lines of credit. Generally speaking, a company needs to have some consistent earnings potential to
be able to offer debt securities to the public at a favorable coupon rate. The higher a company's perceived credit
quality, the easier it becomes to issue debt at low rates and issue higher amounts of debt.
Corporate bonds are longer-term debt instruments issued by companies to raise money for business
expansion. These debt instruments usually have a maturity date of at least a year after issue. Corporate
bonds with a shorter maturity are known as commercial papers.
Benefits of Corporate Bonds
Attractive yields: Corporations generally offer higher yields than government bonds of the same maturity.
Dependable income: Corporate bonds offer investors the opportunity of a steady income, while preserving the
principal.
Safety: Credit rating agencies, like Standard & Poor's and Moody's, rate corporate bonds according to associated
risk and rewards. Ratings reflect the capability of the issuing authority to deliver timely returns. The higher the
rating, the safer the investment.
Diversity: An investor can choose from a variety of sectors and credit-quality characteristics.
Marketability: Most corporate bonds sell easily and quickly due to the market’s size and liquidit.
While corporate bonds offer a higher yield than some other investments, they are also accompanied by higher
risks. These include:
Interest Rate Risk: Interest rate movements can significantly reduce the value of the bond.
Credit Risk: Corporate bonds are not secured by collateral. Thus an investor faces the risk of a corporation failing
to meet the debt obligation.
Event Risk: Corporate bonds have exposure to event-based risks. Corporate reshuffles, takeovers or restructuring
have far reaching consequences on the credit rating and price of such bonds.
Call Risk: Callable corporate bonds can be a nightmare when the issuer declares the purchase of bonds after a
stipulated time period. Corporations usually call off a high-yielding bond when interest rates plummet. This gives
the company a chance to reissue bonds atlower interest rates. In such cases, an investor receives only the par
value of the bond