Definition of Corporate Bond
What is a corporate bond? What is the definition of a corporate bond? What does the term corporate bond mean?
A corporate bond is the issuance of debt by a company with a promise to repay at a later time (the maturity date).
Corporations (even valuable and well-capitalized ones) will issue bonds in order to help cover their day-to-day expenses.
In order to entice people into purchasing their debt, corporations will offer interest payments (otherwise known as the "coupon"). Investors aren't going to buy debt without getting some kind of a return, so companies offer interest payments plus the return of the principal upon maturity of the bond.
The stronger a corporation's credit rating, the less they will pay in interest. A corporation with a AA credit rating, for instance, will pay a far lower rate of interest than a corporation with a BB credit rating. The lower a company's credit rating is, the higher of a chance of default that they have. So, in order to compensate for this higher level of risk, corporations are forced to pay higher rates of interest.
Most corporate bonds are debentures, meaning that the bond is solely backed by the reputation of the company.
Many investors who are looking to generate some income and also preserve their capital will turn to the bond market.
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