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Corporate bonds, explained
Learn what corporate bonds are, how they differ from government bonds, and how to read the prices, yields, and risk terms you see in market coverage.
What a corporate bond actually is
A corporate bond is a loan that investors make to a company. In return, the company promises to pay interest at set intervals and repay the borrowed money on a specific maturity date.
Corporations use bonds to raise money for projects, refinancing, acquisitions, and general operations. The bond is a contract, so the main question for investors is whether the company will keep making its payments on time.
How corporate bonds pay investors
Most corporate bonds pay a fixed coupon, which is the stated interest rate on the bond. Some pay floating interest instead, which resets based on a reference rate plus a spread.
The coupon is not the same thing as the bond's market yield. The coupon is what the bond pays based on its face value, while the yield reflects the return implied by its current market price.
Why bond prices and yields move in opposite directions
If a bond's price goes up, its yield usually goes down. That is because the interest payments are fixed, so paying more for the same cash flows lowers the return.
If the bond's price falls, its yield usually rises. Market news, interest-rate changes, and changes in credit risk can all push corporate bond prices around.
How credit ratings help investors compare risk
Credit rating agencies give many corporate bonds ratings that estimate the issuer's ability to repay. Higher ratings usually mean lower perceived default risk, while lower ratings usually mean higher perceived risk.
Investment-grade bonds are generally considered stronger credits than high-yield bonds, which are also called junk bonds. Those labels do not guarantee safety or trouble, they just describe where the bond sits on the risk scale.
What spread means in corporate bond coverage
A spread is the extra yield a corporate bond offers over a benchmark such as a Treasury bond with a similar maturity. It is one of the main ways the market prices credit risk.
When spreads widen, investors are demanding more compensation for taking corporate credit risk. When spreads narrow, the market is asking for less extra yield.
How maturity changes the bond's behavior
Maturity is the date when the company is scheduled to repay the bond's face value. Shorter-term bonds tend to be less sensitive to interest-rate changes than longer-term bonds, all else equal.
Longer maturities usually mean more time for rates, profits, and credit conditions to change. That is why longer-dated corporate bonds often move more when markets rethink the outlook for a company or for rates overall.
What default and recovery mean
Default happens when a company fails to make scheduled interest or principal payments under the bond terms. A default does not always mean the company disappears, but it does mean the bondholder did not get paid as promised.
If a bond defaults, investors may recover part of their money through restructuring or bankruptcy proceedings. Recovery rates vary widely based on the company, the bond's rank in the capital structure, and legal outcomes.
Common questions
How are corporate bonds different from stocks?
Stockholders own part of a company, while bondholders are lenders. Bondholders usually get fixed payments and have a higher claim on assets than stockholders if a company runs into trouble, but they do not get the upside of ownership in the same way.
Are all corporate bonds taxable the same way?
Tax treatment depends on the investor's country, account type, and the bond itself. In the U.S., interest from most corporate bonds is generally taxable as ordinary income, but personal tax situations can vary, so investors often check with a tax professional.
What does a bond quote usually show?
A quote may show price, yield, coupon, maturity, and sometimes credit rating or spread. Different brokers and data providers format quotes differently, so it helps to know which number is the market price and which number is the yield.
Why would a bond trade above or below face value?
A bond trades above face value when its coupon is more attractive than what the market currently demands, and below face value when its coupon is less attractive or its credit risk has risen. The bond still pays based on its stated terms, but the market price reflects what buyers are willing to pay today.