corporate bonds

(noun)

A corporate bond is a bond issue by a corporation. It is a bond that a corporation issues to raise money effectively in order to expand its business.

Related Terms

Examples of corporate bonds in the following topics:

  • Liquidity and Bond Prices

    • On the other hand, corporate bonds are not as liquid and not as widely traded, so investors have more difficulties in buying and selling them.
    • We start the analysis with the same liquidity in both the government bond and corporate bond markets in Figure 2.
    • However, investors reduce their purchases of corporate bonds because they are less liquid, decreasing the demand function and shifting it leftward.
    • Thus, the government bond prices rise, which reduces the interest rate for government bonds.
    • On the other hand, the corporate bond prices decrease, raising the market interest rate for corporate bond.

  • Default Risk and Bond Price

    • We draw the supply and demand for two markets: government bond market and corporate bond market.
    • Some investors demand fewer corporate bonds and invest more in government bonds.
    • Thus, the demand for corporate bonds falls while the demand for government bonds rise because the investors consider the government bonds default-free.
    • Did you notice the government bonds have a higher bond price while corporate bonds have a lower bond price?
    • Taking the difference between the government bond and corporate bond interest rates, we can calculate the risk premium.

  • The Valuation of Bonds

    • Market interest rate currently is 4% a year, or 2% for a payment period.If the market interest rate drops to 4%, the corporation would not sell this bond at face value because the corporation would pay a higher interest rate than the market.Consequently, the corporation can sell this bond for a greater price, reflecting the market interest rate.
    • We calculate the bond market price in Equation 3, and it, PV0, equals $1,076.15.Therefore, a corporation pays 4%interest on bonds with an 8% interest coupon rate.
    • Registered Bonds: Corporation registers the names and addresses of the bondholders.Most corporations register bonds because the registration protects the investors from loss or theft of the bonds.
    • Debenture Bonds are unsecured bonds.Thus, the corporation does not pledge assets for the bond issues.A corporation must be financially strong to issue these bonds because these bonds rely on the corporation's credit standing.
    • Convertible Bonds: Bondholders have the right to exchange the corporate bonds into corporate stock on a specified date.

  • Overview of Bonds

    • This chapter provides an overview of stocks and bonds, and the methods financial analysts use to calculate the market price using the present value formula.Furthermore, corporations issue a variety of bonds and stocks, and use them to expand business operations.Corporations sell their bonds to investors who buy these bonds and stock for investment.They either hold the bonds until maturity or sell the bonds and stock for a capital gain or loss.Consequently, investors must know the difference between yield to maturity and the rate of return.This chapterexpands on Chapter 6, and we expand the present value formula to value a variety of bonds and stocks.
    • Corporations often borrow money by issuing bonds.A bond is similar to notes payable because they are written promises to pay interest and principal.We show a picture of a bond in Figure 1.Face value of this bond equals $1,000, and this bond matures on February 1, 2020.Consequently, whoever holds this bond will receive $1,000 on this date, and the bondholder also earns $100 ( 0.1 × $1,000) per year in interest.Most bonds pay interest twice annually or $50 every six months for this example.
    • Bonds, however, differ from notes payable.A notes payable is a loan from a single creditor such as a bank, while a bond is a loan that corporations issue in denominations of $1,000, $2,000, etc.Finally, bonds are standardized, and thus, investors can purchase them.Moreover, investors can buy and sell these bonds on the financial markets before the bonds mature.
    • A corporation needing long-term funds may consider issuing additional shares of stock or issuing new bonds.However, if the corporation issues new stock, then the existing stockholders share control with new stockholders.Consequently, the stockholders lose part of control of the corporation.On the other hand, the bondholders do not share in the management or earnings of the corporation.Although the corporation must pay the bond interest, whether it earns profits or losses, bonds reduce net income, thus lowering a corporation's taxes.U.S. corporations pay between 15 and 35% of their net income in taxes.Nevertheless, bond interest payments are an expense, which lowers the corporation's net income.If a corporation issues new bonds, then the common stockholders could increase their dividend earnings.
    • A Corporation Finance an Expansion through Bonds or Stocks

  • Information Costs and Bond Prices

    • Information costs influence the bond prices and interest rates.
    • For example, investors know both U.S. government securities and corporate bonds from large corporations well, and the securities have the lowest information costs.
    • We depict the bond markets in Figure 3.
    • High information cost bonds are not as attractive as an investment, so investors buy fewer bonds, reducing bond prices and raising interest rates.
    • Therefore, low-information-cost bonds pay a lower interest rate.

  • The Nature of Bonds

    • A bond is an instrument of indebtedness of the bond issuer to the holders.
    • The main categories of bonds are corporate bonds, municipal bonds, and U.S.
    • Bond maturities range from a 90-day Treasury bill to a 30-year government bond.
    • Corporate and municipal bonds are typically in the three to 10-year range.
    • A bond is a form of loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.

  • Chapter Questions

    • Explain the similarities and differences between notes payable and a corporate bond.
    • If the yield to maturity is 5% and the bond matures in three years, calculate the market value of this bond.
    • If the yield to maturity is 20% and the bond matures in three years, compute the market value of this bond.
    • You bought a discount bond for $4,500.
    • If a corporation expects to pay $1 dividend every year that grows 3% per year while the market interest rate is 4%, compute the market value of this stock.

  • Corporations

    • A corporation has limited liability.Stockholders own the corporation, and they are not liable for a corporation's debt.If a corporation fails, subsequently, the stockholders only lose their investment, the amount of common stock that they had purchased.
    • Stockholders do not have a mutual agency relationship, where the stockholders cannot bind a corporation to contracts.Stockholders have no say in the daily operation of the corporation even though they own the corporation.
    • Corporations have two disadvantages.First, government heavily regulates corporations.Corporations file many reports with government because corporations can expand into many countries, markets, and industries.Corporations may encourage regulations because bureaucratic red tape creates barriers to entry.Thus, new companies experience troubles entering the market with complex and arduous regulations.Second, government imposes taxes twice on corporations.Corporations pay taxes from their profits.Then stockholders receive profit from the corporation as dividends, and the dividends become income to the stockholder that a government also taxes.
    • Protected Preferred Stock – a corporation must deposit part of its profits into a fund, and, thus, the corporation can guarantee dividend payments to preferred stockholders.
    • Issuing of stock allows corporations to garner large amounts of financial capital.Furthermore, a corporation can raise capital by issuing bonds.A bond is a loan.However, a bond is standardized, allowing investors to buy or sell bonds on the financial markets.Moreover, a bondholder has two rights.First, a corporation pays interest on the bond, regardless of a corporation's financial position.Second, a corporation pays the face value of the bond on a specific date in the future.If a corporation bankrupts or it is dissolved, subsequently, the corporate debts are paid first that include bonds, bank loans, and taxes.If any assets remain,then the preferred stock holders are paid, and finally, the common stockholders are last.

  • Bond Rating System

    • The credit rating is a financial indicator assigned by credit rating agencies; bond ratings below BBB-/Baa are considered junk bonds.
    • Bond ratings below BBB-/Baa are considered to be not investment grade and are colloquially called "junk bonds. "
    • Bonds that are not rated as investment-grade bonds are known as high-yield bonds or more derisively as junk bonds.
    • The risks associated with investment-grade bonds (or investment-grade corporate debt) are considered significantly higher than those associated with first-class government bonds.
    • Bond ratings below BBB-/Baa are considered to be not investment grade and are colloquially called "junk bonds

  • Other Types of Bonds

    • Other bonds include register vs. bearer bonds, convertible bonds, exchangeable bonds, asset-backed securities, and foreign currency bonds.
    • Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
    • Convertible bonds are bonds that let a bondholder exchange a bond for a number of shares of the issuer's common stock.
    • Exchangeable bonds allows for exchange to shares of a corporation other than the issuer.
    • Eurodollar bond - U.S. dollar-denominated bond issued by a non-U.S.