Corporate Bond

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What is a Corporate Bond? Meaning.

A Corporate Bond is a bond issued by a corporation. They are debt obligations or IOUs issued by companies. A bond is a long-term (1 - 30 years) interest-bearing debt security that obligates the issuer to pay the holder interest and repay the principal amount (usually Par Value of $1000) of the loan at maturity. It is a loan in the form of a security. That's why the borrower is called issuer, the lender is called bond holder. The coupons (interest payments) belonging to the bond are usually taxable. Most corporate bonds are fixed-rate bonds. The interest rate the corporation pays is fixed until maturity and never changes.

Companies use the funds they raise from selling bonds for a variety of purposes, from investing in new facilities to purchasing equipment to expanding the business. Two other main alternatives to acquire these funds is through issuing shares of stock, or borrowing from a bank.

Unlike stockholders, bondholders do not own part of the issuing company: they are merely lenders to the issuing company. Bonds normally have a limited lifespan, whereas stocks are indefinite. Bonds are considered to be less risky than stocks since, in the case of bankruptcy, the company has to pay off all its debts (including bonds) before it handles its obligations to stockholders. Furthermore, bond insurance can provide protection for investors against economical loss, in return for paying a specified premium to a third party, usually an insurance company. The premium will provide interest and capital repayments as specified in the bond policy in the event of payment default of the issuer.

Compared to government bonds, corporate bonds generally, but not necessarily, have a higher risk associated with them and offer higher yields. They are typically sold (issued) through underwriting: a syndicate of banks, underwrite the bonds, and sell them on to their customers.

A Convertible Bond can be exchanged, on the maturity date, under prescribed conditions, for other securities (normally regular stock) of the issuing company.

A Secured Bond is backed by collateral which may be sold by the bondholder if the issuer fails to pay interest or principal when it is due.

A Guaranteed Bond is a corporate bond whose principal and/or interest payments are guaranteed by a corporation other than the issuer, often the parent company.

The market price of a bond is the present value of all future interest and principal payments of the bond discounted at the bond's yield, or rate of return. The yield represents the current market interest rate for bonds with similar characteristics. The yield and price of a bond are inversely related so that when market interest rates rise, bond prices generally fall and vice versa.

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Compare with: Warrant  |  Subscription Right  |  Fair Value  |  Face Value  |  Redemption Value  |  Maturity Date  |  Yield to Maturity

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