How Do Corporate Bonds Work  

      Corporate bonds are bonds issued by large and major companies. These bonds can be primarily divided into five major groups, which are as follows: Industrials, Banks and other finance companies, Transportation, International, and Utilities.

       Bonds issued by companies in industrial sector include manufacturing, mining and retail companies. Transportation bonds are issued by airlines, trucking companies and railroads. Utilities’ bonds are issued by water companies, electricity companies and telephone companies. And, International bonds are issued by foreign countries, foreign agencies and foreign municipalities.

       Corporate bonds are issued as a means of raising money so that companies can expand, buy new equipment or set up a new manufacturing unit without causing any stir in the stock market about the state of their finance.

        Buying a bond means taking on an implied event risk. Events like takeovers, or corporate restructuring can have a huge impact on the credit rating of a bond and at times these events can even influence the price of a bond. However, most people do not have the inside information to predict changes in bonds so companies issuing bonds have provide additional features to do away with uncertainty associated with corporate bonds. Some of the additional features that are included in corporate bonds are poison pill provision, floating rate notes and putable bonds.

        One company can issue bonds several times and each time the issue will have different ratings from rating agencies as different issues will have different repayment structures and conditions. Even the maturity date of different bond issues from the same company might vary depending on when the bond was issued.

        Even junk bonds are corporate bonds but are high yield bonds. These bonds are speculative in nature and have a very low credit rating. Junk bonds are issued by companies that have severe financial problems and want to raise money immediately. Even companies who are trying to come out of bankruptcies issue junk bonds.

        Although junk bonds are quite risky but the current trend in the corporate bond market shows that 1 out of every 5 company is put in junk status. Even some big companies are put into junk status. Most companies in junk status are doing what they want to do without taking into consideration the market condition.

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