Q. 8 Corporate Bond
Content
A corporate bond is a bond issued by a corporation. It is a bond that a corporation issues to raise money in order to expand its business. ]The term is usually applied to longer-term debt instruments, generally with a maturity date falling at least a year after their issue date. (The term "commercial paper" is sometimes used for instruments with a shorter maturity.) Sometimes, the term "corporate bonds" is used to include all bonds except those issued bygovernments in their own currencies. Strictly speaking, however, it only applies to those issued by corporations. The bonds of local authorities and supranational organizations do not fit in either category. Corporate bonds are often listed on major exchanges (bonds there are called "listed" bonds) and ECNslike MarketAxess, and the coupon (i.e. interest payment) is usually taxable. Sometimes this coupon can be zero with a high redemption value. However, despite being listed on exchanges, the vast majority of trading volume in corporate bonds in most developed markets takes place in decentralized, dealer-based, over-thecounter markets. Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. Other bonds, known as convertible bonds, allow investors to convert the bond into equity. One can obtain an unfunded synthetic exposure to corporate bonds via credit default swap The Reserve Bank’s role in the development of corporate bond markets is indirect and is governed by its interest in monetary policy transmission and in the stability and efficiency of the financial sector as a whole. Besides, banks, whose financial health is the responsibility of the central bank, have a large exposure to the corporate bond market with more than 80 per cent of such investments being in privately placed corporate securities. Activity in the secondary market is thus rather thin. As the non-transparent practices in this market is a matter of concern, Reserve Bank issued guidelines in June 2001 specifying the due diligence to be undertaken, disclosures to be obtained and credit appraisal to be made by investing banks. Subsequently a Working Group set up by RBI (February 2002) went into the detailed disclosure norms and data collection measures on private placements. Currently, RBI and SEBI are working together to devise a regulating mechanism for the issuers of private placements which will address issues of quality, transparency, end-use of funds and listing of such bonds. There is no comprehensive database source for outstanding stock of corporate debt issuance in India. An analysis of the flow data (issuances) in recent period indicates dominance of private placement Corporate debt falls into several broad categories:
secured debt vs unsecured debt senior debt vs subordinated debt
Generally, the higher one's position in the company's capital structure, the stronger one's claims to the company's assets in the event of a default. A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies. Corporate bonds are issued in blocks of $1,000 in par value, and almost all have a standard coupon payment structure. Corporate bonds may also have call provisions to allow for early prepayment if prevailing rates change. Corporate bonds, i.e. debt financing, are a major source of capital for many businesses along with equity and
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bank loans/lines of credit. Generally speaking, a company needs to have some consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate. The higher a company's perceived credit quality, the easier it becomes to issue debt at low rates and issue higher amounts of debt. Corporate bonds are longer-term debt instruments issued by companies to raise money for business expansion. These debt instruments usually have a maturity date of at least a year after issue. Corporate
bonds with a shorter maturity are known as commercial papers. Benefits of Corporate Bonds
Attractive yields: Corporations generally offer higher yields than government bonds of the same maturity. Dependable income: Corporate bonds offer investors the opportunity of a steady income, while preserving the principal. Safety: Credit rating agencies, like Standard & Poor's and Moody's, rate corporate bonds according to associated risk and rewards. Ratings reflect the capability of the issuing authority to deliver timely returns. The higher the rating, the safer the investment. Diversity: An investor can choose from a variety of sectors and credit-quality characteristics. Marketability: Most corporate bonds sell easily and quickly due to the market’s size and liquidit. Drawbacks of Corporate Bonds While corporate bonds offer a higher yield than some other investments, they are also accompanied by higher risks. These include: Interest Rate Risk: Interest rate movements can significantly reduce the value of the bond. Credit Risk: Corporate bonds are not secured by collateral. Thus an investor faces the risk of a corporation failing to meet the debt obligation. Event Risk: Corporate bonds have exposure to event-based risks. Corporate reshuffles, takeovers or restructuring have far reaching consequences on the credit rating and price of such bonds. Call Risk: Callable corporate bonds can be a nightmare when the issuer declares the purchase of bonds after a stipulated time period. Corporations usually call off a high-yielding bond when interest rates plummet. This gives the company a chance to reissue bonds atlower interest rates. In such cases, an investor receives only the par value of the bond
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secured debt vs unsecured debt senior debt vs subordinated debt
Generally, the higher one's position in the company's capital structure, the stronger one's claims to the company's assets in the event of a default. A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies. Corporate bonds are issued in blocks of $1,000 in par value, and almost all have a standard coupon payment structure. Corporate bonds may also have call provisions to allow for early prepayment if prevailing rates change. Corporate bonds, i.e. debt financing, are a major source of capital for many businesses along with equity and
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bank loans/lines of credit. Generally speaking, a company needs to have some consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate. The higher a company's perceived credit quality, the easier it becomes to issue debt at low rates and issue higher amounts of debt. Corporate bonds are longer-term debt instruments issued by companies to raise money for business expansion. These debt instruments usually have a maturity date of at least a year after issue. Corporate
bonds with a shorter maturity are known as commercial papers. Benefits of Corporate Bonds
Attractive yields: Corporations generally offer higher yields than government bonds of the same maturity. Dependable income: Corporate bonds offer investors the opportunity of a steady income, while preserving the principal. Safety: Credit rating agencies, like Standard & Poor's and Moody's, rate corporate bonds according to associated risk and rewards. Ratings reflect the capability of the issuing authority to deliver timely returns. The higher the rating, the safer the investment. Diversity: An investor can choose from a variety of sectors and credit-quality characteristics. Marketability: Most corporate bonds sell easily and quickly due to the market’s size and liquidit. Drawbacks of Corporate Bonds While corporate bonds offer a higher yield than some other investments, they are also accompanied by higher risks. These include: Interest Rate Risk: Interest rate movements can significantly reduce the value of the bond. Credit Risk: Corporate bonds are not secured by collateral. Thus an investor faces the risk of a corporation failing to meet the debt obligation. Event Risk: Corporate bonds have exposure to event-based risks. Corporate reshuffles, takeovers or restructuring have far reaching consequences on the credit rating and price of such bonds. Call Risk: Callable corporate bonds can be a nightmare when the issuer declares the purchase of bonds after a stipulated time period. Corporations usually call off a high-yielding bond when interest rates plummet. This gives the company a chance to reissue bonds atlower interest rates. In such cases, an investor receives only the par value of the bond
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