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A corporate bond is a bond issued by a corporation.

It is a bond that a corporation issues


to raise money in order to expand its business.[1] The term is usually applied to longer-
term debt instruments, generally with a maturity date falling at least a year after their
issue date. (The term "commercial paper" is sometimes used for instruments with a
shorter maturity.)

Sometimes, the term "corporate bonds" is used to include all bonds except those issued
by governments in their own currencies. Strictly speaking, however, it only applies to
those issued by corporations. The bonds of local authorities and supranational
organizations do not fit in either category.[clarification needed]

Corporate bonds are often listed on major exchanges (bonds there are called "listed"
bonds) and ECNs like Bonds.com and MarketAxess, and the coupon (i.e. interest
payment) is usually taxable. Sometimes this coupon can be zero with a high redemption
value. However, despite being listed on exchanges, the vast majority of trading volume in
corporate bonds in most developed markets takes place in decentralized, dealer-based,
over-the-counter markets.

Some corporate bonds have an embedded call option that allows the issuer to redeem the
debt before its maturity date. Other bonds, known as convertible bonds, allow investors to
convert the bond into equity.

Corporate Credit spreads may alternatively be earned in exchange for default risk through
the mechanism of Credit Default Swaps which give an unfunded synthetic exposure to
similar risks on the same 'Reference Entities'. However, owing to quite volatile CDS
'basis' the spreads on CDS and the credit spreads on corporate bonds can be significantly
different.

Contents
[hide]

• 1 Types
• 2 Risk analysis
• 3 Other risks in Corporate Bonds
• 4 Corporate bond indices

• 5 References

[edit] Types
Corporate debt falls into several broad categories:

• secured debt vs unsecured debt


• senior debt vs subordinated debt
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.

[edit] Risk analysis


Compared to government bonds, corporate bonds generally have a higher risk of default.
This risk depends, of course, upon the particular corporation issuing the bond, the current
market conditions and governments to which the bond issuer is being compared and the
rating of the company. Corporate bond holders are compensated for this risk by receiving
a higher yield than government bonds. This comes to the conclusion that higher the risk,
higher the profit.

[edit] Other risks in Corporate Bonds


Default Risk has been discussed above but there are also other risks for which corporate
bondholders expect to be compensated by credit spread. This is, for example why the
Option Adjusted Spread on a Ginnie Mae MBS will usually be higher than zero to the
Treasury curve.

Credit Spread Risk. The risk that the credit spread of a bond (extra yield to compensate
investors for taking default risk), which is inherent in the fixed coupon, becomes
insufficient compensation for default risk that has later deteriorated. As the coupon is
fixed the only way the credit spread can readjust to new circumstances is by the market
price of the bond falling and the yield rising to such a level that an appropriate credit
spread is offered.

Interest Rate Risk. The level of Yields generally in a bond market, as expressed by
Government Bond Yields, may change and thus bring about changes in the market value
of Fixed-Coupon bonds so that their Yield to Maturity adjusts to newly appropriate
levels.

Liquidity Risk. There may not be a continuous secondary market for a bond, thus leaving
an investor with difficulty in selling at, or even near to, a fair price.

Supply Risk. Heavy issuance of new bonds similar to the one held may depress their
prices.

Inflation Risk. Inflation reduces the real value of future fixed cash flows. An anticipation
of inflation, or higher inflation, may depress prices immediately.

Tax Change Risk. Unanticipated changes in taxation may adversely impact the value of a
bond to investors and consequently its immediate market value.