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Corporate bonds are debt securities issued by private or public corporations to raise working capital, or capital for expenditures such as plant construction, equipment purchases and business expansion. The total value of corporate bonds outstanding is greater than the value of outstanding municipal bonds, U.S. government securities, and government agency securities.
Many corporate bonds are traded in major exchanges like the NYSE, and major Electronic Communications Networks (ECNs) like MarketAxess, but the vast majority of corporate bond trading takes place in decentralized over-the-counter markets. Corporate bonds are usually issued in multiples of $1,000 or $5,000.
The purchase of a bond does not transfer a portion of company ownership to the bondholder. Rather, the bondholder is lending money to the corporation, called the issuer in this transaction, and in exchange the corporation promises to return the bondholder's money (the principal) on a certain date. In the mean time, the issuer pays the bondholder for the use of his money. The price of money is called interest, and a bond's interest rate is called its coupon. The interest on corporate bonds is fully taxable.
Investors in corporate bonds have a wide range of choices when it comes to bond structures, coupon rates, maturity dates, credit quality and industry exposure. The Securities Industry and Financial Markets Association (SIMFA), the National Association of Securities Dealers (NASD) and the Bond Market Association (BMA) all offer a wealth of information about specific bond issues, helping investors find the corporate bonds that are right for them.
There are two general classes of corporate bonds:
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