Corporate bonds are bonds issued by corporations in order to raise money for their business. It is one of the major sources of financing by corporates after bank borrowing. The term corporate bonds is generally used for secured debt which is backed by collateral. The collateral can be real estate, plant and machinery, or even financial assets such as stocks and bonds. Corporations also issue unsecured debt which is popularly referred to as debentures.
The corporate bonds are usually issued with a face value of $1,000 and have a single coupon rate and maturity, with a standard coupon payment structure. The corporate issuer promises to pay periodic coupon payments on designated dates and to repay par or principal value of the bond at maturity. Most corporate bonds are term bonds; that is, they run for a term of years, and then become due and payable.
In a corporate bond, the issuer is obligated to pay the principal and interest on the specified schedule to the investors. Failure to do so is considered default with legal consequences.
The corporate bonds are considered more risky compared to government securities. The risk is determined based on the ratings issued by rating agencies to corporates as well as specific debt issues. The investors are compensated for the additional risk in the form of higher coupon rates. Higher credit quality means lower cost of borrowing and vice verse.
Corporate bonds can be classified according to their maturity. Maturities can be short term (less than three years), medium term (four to 10 years), or long term (more than 10 years).