Corporate bonds are effectively I.O.U. notes issued by corporations in order to raise capital to expand their business. They pay a fixed rate of interest, known as the coupon rate, which is expressed in currency rather than percentage terms. Usually, corporate bonds are longer-term debt instruments, with a maturity date that is at least a year after their issue date. Corporate bonds with a loan length of less than a year are often called ‘commercial paper’ to distinguish them from longer-term corporate bonds. Occasionally, the term ‘corporate bonds’ is used to describe all types of bond, other than those issued by national governments in their own currencies, such as those issued by international organisations or local authorities. However, strictly speaking the term ‘corporate bonds’ only refers to bonds that are issued by corporations.

Corporate bonds are often listed on major exchanges, and these bonds are known as listed bonds. With listed bonds, the coupon payments are usually taxable, so corporations often get around this by offering zero coupon rates and high redemption values. However, most of the trading in corporate bonds takes place in decentralised, dealer-based markets. Some corporate bonds feature a call option that allows the company that issued them to pay off the bond early in order to reduce their debt burden. Other corporate bonds may give the option to convert them into equity within a certain time frame, and these are usually referred to as convertible bonds, or convertibles.

Corporate bonds are traded on the open market, and their value can go up and down based on a number of factors, such as the performance of the company that issued them, the state of the market in general, and how long they have to go before they mature. While they can be traded in much the same way as stocks and shares, they are not nearly as risky an investment. There are a number of reasons for this. Firstly, corporate bonds do not tend to fluctuate in value nearly as much as equities, as investors will always have the coupon rate and redemption value to fall back on. Secondly, if the company that issued them were to go into liquidation, bondholders are classed as creditors and are therefore among the first in line to receive a refund, before any of the shareholders can claim one.

The only real risk with corporate bonds is that the company that issued them will go under, and will be unable to pay back all the money that they owe. This makes them slightly more risky than government bonds, as it is very rare for a country to go bankrupt. As a general rule, companies with less secure financial foundations tend to offer higher coupon rates to compensate for the added risk. Other factors that can affect the coupon rates offered by corporate bonds include the state of the markets, and the amount of competition from other issuers of corporate bonds. During a recession, the market is usually flooded with firms looking to raise money by issuing corporate bonds, which means they have to offer higher coupon rates in order to attract investors.