Corporate Bond

What is a 'Corporate Bond'

A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds.

Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies.

BREAKING DOWN 'Corporate Bond'

Corporate bonds are issued in blocks of $1,000 in par value, and almost all have a standard coupon payment structure. Corporate bonds may also have call provisions to allow for early prepayment if prevailing rates change.

Corporate bonds, i.e. debt financing, are a major source of capital for many businesses along with equity and bank loans/lines of credit. Generally speaking, a company needs to have some consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate. The higher a company's perceived credit quality, the easier it becomes to issue debt at low rates and issue higher amounts of debt.

Most corporate bonds are taxable with terms of more than one year. Corporate debt that matures in less than one year is typically called "commercial paper".

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