The Corporate Bond Market deals with the trading of Corporate Bonds.
A Corporate Bond is that type of a Bond or debt security or IOU, which is issued by a Corporation. A person buying a Corporate Bond becomes a lender to the Corporation. The Corporation gives an assurance that his money or principal will be returned on a particular maturity date. Till that period, a fixed rate of interest will be paid to the lender. The interest payments are done semi-annually or half-yearly. In case of z ero-coupon bonds, no periodic interest is paid. The coupon or interest payment of a Corporate Bond is taxable.
Corporate Bonds are long-term debt instruments. They have a maturity term. Usually, the maturity date falls at least after 12 months of their date of issue. Usually, the par value of a Corporate Bond is $1,000. A Corporate Bond is traded on major exchanges.
In comparison to Government Bonds, the risk of default in case of a Corporate Bond is quite high. However, this risk is dependent upon the comparison of the particular corporation, present market conditions, and governments. The Credit Rating of the particular corporation also plays a major role. Various Corporations issue Corporate Bonds for the purpose of raising capital and maintenance of operating cash flow. A wide range of Corporations issue Corporate Bonds. These Corporations include Financial Institutions, Industrial Groups, or Service Industry Companies. The Corporate Bond Market is larger than each of the following markets such as Municipal Bond Markets, Government Agency Securities Markets, and U.S. Treasury Securities Markets in terms of the total face value of outstanding bonds. Corporate Bond investors have a variety of choices to make in terms of coupon rates, bond structures, credit quality, maturity dates, and industry exposure.
Corporate Bonds can be categorized into two parts:
- High-Yield Bonds or Junk Bonds
- Fixed-Rate Capital Securities
The indices used in the U.S. Corporate Bond Market are the following:
- Merrill Lynch U.S. Financials Index
- Merrill Lynch U.S. Industrials Index
- Merrill Lynch U.S. Utilities Index
The Credit Ratings of Corporate Bonds are done by Rating Agencies. They evaluate the financial health of a Corporate Bond Issuer and the assessment of its timely repayment ability is done.
In the United States, the main Credit Rating Agencies are:
- Fitch IBCA
- Moody's Investor Services
- Standard & Poor's Ratings Services
