When companies want to expand operations or replace existing funding, they often turn to the corporate bond market to borrow money. A company determines how much it would like to borrow and then issues a bond offering in that amount; investors that buy a bond are effectively lending money to the company according to the terms established in a bond document known as a bond covenant.
Categories of Corporate Bonds
There are two main categories of corporate bond; investment grade and speculative, with varying degrees of quality as shown in the below diagram
Characteristics of corporate bonds
The corporate bond market has attracts many investors seeking higher yields than those offered by government bonds. In general, corporates are the second largest sector in the bond market after government bonds.
Unlike equities, ownership of corporate bonds does not signify an ownership interest in the company that has issued the bond. Instead, the company pays the investor a rate of (taxable) interest over a period of time and repays the principal at the maturity date established at the time of the bond’s issue.
While some corporate bonds have redemption or call features that can affect the maturity date, most are loosely categorized into the following maturity ranges:
Short-term notes (with maturities of up to five years)
Medium-term notes (with maturities ranging between five and 12 years)
Long-term bonds (with maturities greater than 12 years
The corporate dividing line: Investment-grade vs. speculative-grade bonds
Corporate bonds have a range of ratings because the financial health of issuers can vary widely. Corporate bonds fall into two broad classifications: investment-grade and speculative-grade (or high yield) bonds. Speculative-grade bonds are issued by companies perceived to have a lower level of credit quality compared to more highly rated, investment-grade, companies.