Company Issues Debt
A company issues bonds to raise capital for business needs such as expansion, refinancing, acquisitions or other corporate purposes.
CORPORATE BONDS
Corporate Bonds Explained How They Work and What Investors Should Know
Understand how corporate bonds work, how companies raise money through debt, how investors earn interest, what affects bond prices and yields, and the risks to consider before investing.
Interest Income
Credit Risk
Bond Maturity
CORPORATE
BOND
FIXED INCOME
Company
Maturity
Yield
UNDERSTANDING CORPORATE BONDS
What are corporate bonds?
Corporate bonds are debt securities issued by companies to raise capital. Instead of obtaining all of their funding through equity, bank financing or retained earnings, businesses can borrow money from investors by issuing bonds.
When an investor purchases a corporate bond, the investor is lending money to the issuing company under specified terms. Those terms can include the bond's maturity date, interest payment structure, principal amount and other conditions.
In return for providing capital, investors may receive interest payments during the life of the bond. If the bond is held until maturity and the issuer meets its obligations, the principal is generally scheduled to be repaid according to the bond's terms.
A company raises capital through debt
Investors provide capital under defined terms in exchange for potential interest income and repayment at maturity.
HOW CORPORATE BONDS WORK
From company financing to investor repayment.
A corporate bond connects companies looking for financing with investors seeking potential income from fixed-income securities.
Investors Provide Capital
Investors purchase the bonds and provide money to the company under the terms established when the debt security is issued.
Interest May Be Paid
Depending on the bond structure, investors may receive scheduled interest payments during the investment period.
Principal Reaches Maturity
If the issuer meets its obligations, the principal is generally scheduled for repayment when the bond reaches maturity.
CORPORATE DEBT BASICS
Why companies issue corporate bonds.
Businesses require capital for many different reasons. Corporate bonds provide another financing channel that can allow companies to access investors directly through the debt markets.
The funds raised through a bond issue may support expansion, infrastructure, acquisitions, refinancing existing debt, working capital or other corporate objectives.
Access to capital markets
Potentially flexible financing
Defined debt terms
TYPES OF CORPORATE BONDS
Corporate bonds can have different structures.
Corporate debt securities can differ in their repayment structure, credit quality, maturity and other characteristics.
01
Investment-Grade Bonds
These bonds are issued by companies that meet defined credit-quality criteria. Investors generally examine issuer financial strength and credit ratings when evaluating them.
02
High-Yield Bonds
Bonds with lower credit ratings may offer higher yields to compensate investors for taking on greater credit and default risk.
03
Secured and Unsecured Debt
Some corporate bonds may be backed by specific assets, while unsecured debt relies more directly on the issuer's overall ability to meet its obligations.
YIELD AND INTEREST
A bond's coupon is not the same as its yield.
Investors often encounter both coupon rates and bond yields when researching corporate bonds. The coupon describes the interest rate specified by the bond's terms, while yield can reflect the return associated with the bond's current market price and payment characteristics.
If a bond trades above or below its original issue price, its yield can differ from its stated coupon rate. This distinction becomes particularly important when comparing bonds available in the secondary market.
Understand Bonds →PRICE
YIELD
WHAT TO EVALUATE
Look at more than the interest rate.
A corporate bond should be evaluated using several characteristics because the headline yield alone does not describe the entire investment profile.
Credit Quality
Review the issuer's financial position and available credit information to understand the potential level of credit risk.
Maturity
Consider how long the capital will remain invested and when the principal is scheduled to be repaid.
Yield
Compare yield with the bond's price, maturity, credit profile and other relevant characteristics.
Interest Rate Sensitivity
Changes in market interest rates can influence the price of existing corporate bonds.
Liquidity
Consider how actively the security trades and how easily it could potentially be sold when needed.
Issuer Fundamentals
Revenue, cash flow, debt levels and business conditions can all influence an issuer's financial strength.
CORPORATE BOND RISKS
Higher potential income can come with additional risk.
Corporate bonds are subject to risks that can differ from those associated with government securities. Understanding these risks is important before making an investment decision.
Credit Risk
The issuing company may experience financial difficulties and could fail to make interest or principal payments according to the bond's terms.
Interest Rate Risk
Existing corporate bond prices can move when market interest rates rise or fall.
Liquidity Risk
Some corporate bonds may have limited trading activity, which can affect the ease or price of selling them.
Business Risk
Changes in an issuer's industry, operations, profitability or financial position can affect its ability to service debt.
CORPORATE VS GOVERNMENT BONDS
Different bonds can serve different purposes.
Comparing corporate and government bonds can help investors understand how issuer, yield and risk characteristics differ.
Factor
Corporate Bonds
Government Bonds
Issuer
Companies
Government entities
Credit Risk
Depends on issuer
Depends on government issuer
Potential Yield
Can vary by credit quality
Depends on security and market
Market Price
Can change before maturity
Can change before maturity
Key Considerations
Credit, yield, maturity and liquidity
Yield, maturity and rate sensitivity
PORTFOLIO ROLE
Where can corporate bonds fit within an investment portfolio?
Some investors consider corporate bonds as part of a diversified fixed-income allocation. They may provide potential interest income while adding an asset type that behaves differently from equity investments.
The appropriate role depends on the investor's objectives, time horizon, liquidity requirements, risk tolerance and the characteristics of the individual bond.
FIXED
INCOME
PORTFOLIO
Yield
Potential Income
Risk
Issuer Dependent
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FREQUENTLY ASKED QUESTIONS
Common questions about corporate bonds.
Corporate bonds are debt securities issued by companies to raise capital. Investors provide money to the issuer under defined terms that can include interest payments and a maturity date.
Investors purchase corporate bonds and provide capital to the issuing company. Depending on the bond structure, investors may receive interest payments and the principal is generally scheduled for repayment at maturity.
Corporate bonds carry risks including credit risk, interest rate risk, liquidity risk and business risk. The level of risk varies significantly between issuers and securities.
Bond yield represents the return associated with a bond based on factors such as its market price, interest payments and maturity. Yield can differ from the bond's stated coupon rate.
Corporate bond prices can be influenced by market interest rates, issuer credit quality, economic conditions, investor demand, liquidity, maturity and expectations about future financial conditions.
Many corporate bonds can be traded before maturity, but the ability to sell and the price received can depend on market liquidity and current market conditions.
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