A:

Bonds can be traded over-the-counter (OTC) and, in fact, the majority of corporate bonds that are issued by private and public corporations are traded OTC rather than on exchanges. Furthermore, many of the transactions involving exchange-traded bonds are done through OTC markets.

Corporate bonds are issued by firms to raise capital to fund various expenditures. They are attractive to investors because they provide much higher yields than bonds issued by the government. However, this higher yield is accompanied by higher risk. Investment in corporate bonds comes primarily from pension funds, mutual funds, banks, insurance companies and individual investors.

The bonds that are traded on the OTC markets are most beneficial in the liquidity that they provide. According to the Bond Market Association, total bond issuance for 2005 reached $5.52 trillion and new corporate bond issuance was $678 billion. This liquidity provides ample protection for investors looking to sell bonds before maturity. Along with this liquidity, corporate bonds traded OTC provide a steady stream of income and security because they are rated based on the credit history of the issuing firm. (For further reading, see What Is A Corporate Credit Rating?)

However, these bonds are not perfect investments and they include major risk, such as credit risk and call risk. Credit risk can arise when an issuer is unable to maintain payments on the bond or if the credit rating of the issuer is lowered by a rating corporation. Call risk arises when an issuer redeems the issue before maturity, leaving the investor with less favorable investing possibilities.

For more information, see our Bonds Basics tutorial and Corporate Bonds: An Introduction to Credit Risk.

RELATED FAQS
  1. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
  2. Why are most bonds traded on the secondary market "over the counter"?

    Like stocks, after issuance in the primary market, bonds are traded between investors in the secondary market. However, unlike ... Read Answer >>
  3. Where can I find information about corporate bond issues?

    Learn information about corporate bond investments, including where investors can access information about new corporate ... Read Answer >>
  4. Why are simple-interest loans preferred by payday loan companies and pawn shops?

    Learn how you can invest in the corporate bond market without investing a large amount of capital through bond funds and ... Read Answer >>
Related Articles
  1. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  2. Investing

    U.S. Corporate Bonds: The Last Safe Place to Make Money

    There aren't many other sources right now for relatively safe, steady income.
  3. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  4. Investing

    An Introduction To Corporate Bond ETFs

    Learn about the pros and cons of these specialized ETFs, and get in on the opportunities they can provide.
  5. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  6. Retirement

    How to Pick the Right Bonds For Your IRA

    Learn about the best types of bonds to include in an IRA depending on an investor's risk tolerance. Understand the tax benefits of holding bonds in an IRA.
  7. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  8. Financial Advisor

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security ...
  3. Extendable Bond

    A long-term debt security that includes an option to lengthen ...
  4. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  5. Yellow Sheets

    A United States bulletin that provides updated bid and ask prices ...
  6. U.S. Savings Bonds

    A U.S. government savings bond that offers a fixed rate of interest ...
Hot Definitions
  1. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  2. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
  4. Border Adjustment Tax

    A tax levied on goods based on where they are sold – exported goods are exempt from tax; those imported and sold in the ...
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Blind Trust

    A trust in which the trustees have full discretion over the assets, and the trust beneficiaries have no knowledge of the ...
Trading Center