What Are Corporate Bonds?
Continuing economic and financial volatility has cemented in investors’ minds the importance of diversification across asset classes. As interest rates have been driven GWG L bonds attorney” down, and government gilt yields have fallen, investors seeking income or a higher rate of interest are increasingly turning to corporate bonds.
What is the bond market?
The bond market, also known as the debt, credit, or fixed income market, is a financial market where
participants buy and sell debt, usually in the form of bonds (1). As of 2006, the size of the global bond market was an estimated $45 trillion with Corporate bonds accounting for $15 trillion in issue (source: Merrill Lynch Bond Index Almanac). Since the mid-1990s, corporate bond markets have become an increasingly important source of financing for companies, even more so with the recent credit and liquidity crunches (2) which have caused banks to reduce their lending.
What is a Corporate Bond?
A ‘corporate bond’ is an ‘IOU’ issued by a company (corporation) rather than a government, typically with a maturity of greater than one year; anything less than that is often referred to as commercial paper (3). They are a way to raise money for projects and investment and are also known as credit. The issuance of a bond will often provide low cost finance, especially the case in recent years with low inflation, interest rates and good corporate stability. The low cost of the interest or coupon payments can be further reduced by the fact the payments are generally tax deductible. By issuing bonds, rather than equity, a company will also avoid diluting the equity in the company.
A company seeking to raise money issues corporate bonds. These will typically be bought by investors at what is known as “par”, usually for 100p. Like equities, bonds can be bought and sold until maturity and values can fluctuate depending on supply and demand. Other external factors, such as interest rates, can also impact the price. The company commits to pay a coupon or rate of interest to the investor. This will generally be a fixed amount and is paid annually or semi-annually. After a defined period, set at outset, the bond is repaid by the company. Bonds will typically redeem at par or 100p irrespective of how the market price has fluctuated before maturity.
How are Corporate Bonds rated and by whom?
Independent ratings agencies are responsible for researching companies and supplying ‘grades’ or ‘ratings’ to companies’ debt (bond issues). The most readily recognized ratings agencies are Standard & Poor’s, Moody’s and Fitch Ratings.