Corporate Bonds Definition
Corporate bonds, issued by a Corporation, are meant to raise the funds for the company’s expansion plans. Equity, loans from banks and corporation bonds are the major sources for corporate to raise the funds. The corporate bonds usually have the maturity period of at least one year. If a corporation issues bonds that has short term maturity period, it is called as commercial paper.
The interests (coupons) on corporation bonds are taxable. Some corporations might issue corporation bonds which do not pay any interest during the life of the bond but its redemption value at the end of the maturity period might be higher.
Corporate bonds are generally listed on major stock exchanges where they are known as listed bonds. However, most of its trading is done in dealer-based markets. Some corporations include the call option facility in their Corporation bonds i.e. an investor can get redemption before the expiry of the maturity date while others issue convertible bonds which can be converted from bonds to equity.
Advantages of Corporate Bonds:
- Corporate bonds generally offer higher interest rate when compared to government bonds as investors run a huge risk in case of company issuing the bonds going default on payments.
- Corporate bonds provide steady income to investors in the form of coupons / interest rate.
- There are many corporate bonds in the market at any point of time, giving the investors a chance to opt for bonds from different sectors.
- Corporate bonds have a huge secondary market so investors can sell them to others at higher prices, especially if the company issuing the bond has a good credibility and credit ratings.
Disadvantages of Corporate Bonds:
- Corporate bonds, when compared to government bonds, are more risky as the corporate issuing the bond may default on payments.
- If a corporate issues a bond that is callable i.e. the bond that can be purchased back by the company issuing it after a particular time period, then the company might re-purchase those bonds from the investors in case the interest rates decline so that it could release new bonds which will provide low interest rate. So in case the bond investors buy is callable, the investors must ensure that they are compensated appropriately.
- Moreover, if the corporate issuing the bond issues more such bonds in the market, their price would decrease affecting the interests of the investors.
In case of inflation, the prices of the bond may decrease again adversely affecting the investors. Changes in taxation policies also affect the benefits from the corporate bonds.