Corporate bond
What is Corporate bond?
A corporate bond is a debt security issued by a company that promises payments under an indenture and gives investors a contractual claim rather than ownership.
Why companies issue bonds
Companies use bond proceeds for capital investment, acquisitions, working capital, refinancing, dividends, or share repurchases. Structures vary by maturity, currency, coupon, seniority, security, guarantees, and embedded options. The indenture establishes payment and covenant terms, while a trustee may act for bondholders when contractual remedies are needed.
Sources of return and risk
Corporate-bond return combines government rates, credit spread, coupon carry, roll, and issuer events. Credit deterioration can widen spreads before default. Rate exposure may dominate high-quality long bonds, while spread and default risk dominate weaker issuers. Liquidity, calls, currency, recovery, and subordination also affect expected and realized results.
Example
A company issues a seven-year senior unsecured bond at a spread of 150 basis points over the reference curve. Stronger earnings may narrow the spread and lift price. An acquisition funded with new debt may increase leverage, widen spread, and reduce price even if government yields and current coupon payments do not change.
How to interpret it
Analyze the legal entity and claim within the consolidated group. Review leverage, coverage, free cash flow, maturity schedule, liquidity, covenants, collateral, and guarantees. Compare spread and yield with peers of similar seniority and duration. Understand calls and change-of-control provisions. Equity performance can inform analysis but does not determine bondholder recovery.
Limitations
Financial statements can omit rapidly changing contingent or off-balance-sheet risks. Ratings can lag and market spreads can be distorted by liquidity or forced flows. A diversified corporate index may still concentrate in the most indebted issuers because debt-weighting gives larger borrowers larger weights. Recovery and legal outcomes are uncertain in restructuring.
Practical checklist
Read the prospectus and indenture, map corporate structure and priority, model cash flow and refinancing under stress, and estimate recovery. Measure rate and spread duration separately. Monitor ratings, spreads, earnings, leverage, covenants, and liquidity. Aggregate issuer groups across bonds, equities, derivatives, and funds, then test downgrade, default, call, and transaction-cost scenarios. Preserve the complete evidence supporting each documented credit decision.
Sources and further reading
- What Are Corporate Bonds?, Investor.gov, U.S. Securities and Exchange Commission