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CORPORATE BONDS..

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What Does Corporate Bond Mean?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 istypically money to be earned from future operations. Insome cases, the company's physical assets may be used ascollateral for bonds.

Corporate bonds are considered higher risk than governmentbonds. As a result, interest rates are almost always higher,even for top-flight credit quality companies.

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H

ow does investopedia explain CorporateBond..??

y Corporate bonds are issued in blocks of $1,000 inpar value, and almost all have a standard coupon payment structure.Corporate bonds may also have call provisions to allow for earlyprepayment if prevailing rates change..

y Corporate bonds, i.e. debt financing, are a major source of capital formany businesses along with equity and bank loans/lines of credit.

Generally speaking, a company needs to have some consistent earningspotential to be able to offer debt securities to the public at a favorablecoupon rate. The higher a company's perceived credit quality, the easierit becomes to issue debt at low rates and issue higher amounts of debt.

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H

ow does investopedia explainCorporate Bond..?? Cont..

yMost corporate bonds are taxable with terms of more thanone year. Corporate debt that matures in less than one yearis typically called "commercial paper".

y

Corporate bonds are longer-term debt instruments issuedby companies to raise money for business expansion. Thesedebt instruments usually have a maturity date of at least a

year after issue. Corporate bonds with a shorter maturityare known as commercial papers.

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H

o o orpor te o s eliver Yiel ..?

Yield refers to the total amountfrom coupon payments as well as built-in appreciation invalue. The investor would also profit from the built-in priceappreciation of by holding the bond to maturity andreceiving the par value. Some companies issue zero-coupon

bonds, the current yield of which is zero, while the yield tomaturity is only a function of the built-in appreciation invalue

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Benefits of Corporate Bonds.

Here are some benefits of corporate bonds:

y Dependable income: Corporate bonds offer investorsthe opportunity of a steady income, while preservingthe principal.

ySafety: Credit rating agencies, like Standard & Poor'sand Moody's, rate corporate bonds according toassociated risk and rewards. Ratings reflect thecapability of the issuing authority to deliver timelyreturns. The higher the rating, the safer the

investment.

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Benefits of Corporate Bonds CONTyDiversity: An investor can choose from a variety of

sectors and credit-quality characteristics.

yMarketability: Most corporate bonds sell easily andquickly due to the markets size and liquidity.

yAttractive yields: Corporations generally offerhigher yields than government bonds of the samematurity.

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Drawbacks of Corporate Bonds

While corporate bonds offer a higher yield

than some other investments, they are also accompanied byhigher risks. These include:

y Interest Rate Risk: Interest rate movements can

significantly reduce the value of the bond.

y Credit Risk: Corporate bonds are not secured by collateral.Thus an investor faces the risk of a corporation failing to

meet the debt obligation.

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Drawbacks of Corporate Bond.. Cont..

y Event Risk: Corporate bonds have exposure to event-basedrisks. Corporate reshuffles, takeovers or restructuring havefar reaching consequences on the credit rating and price ofsuch bonds..

y Call Risk: Callable corporate bonds can be a nightmare whenthe issuer declares the purchase of bonds after a stipulatedtime period. Corporations usually call off a high-yieldingbond when interest rates plummet. This gives the company achance to reissue bonds at lower interest rates. In such

cases, an investor receives only the par value of the bond..

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R

isks in Corporate Bonds..y Default Risk: has been discussed above but there are also

other risks for which corporate bondholders expect to be

compensated by credit spread

y Credit Spread Risk: The risk that the credit spread of abond., which is inherent in the fixed coupon, becomes

insufficient compensation for default risk that has laterdeteriorated. As the coupon is fixed the only way the creditspread can readjust to new circumstances is by the marketprice of the bond falling and the yield rising to such a levelthat an appropriate credit spread is offered

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Risks in Corporate Bonds CONT..

y Interest Rate Risk. The level of Yields generally in a

bond market, as expressed by Government Bond Yields, maychange and thus bring about changes in the market value ofFixed-Coupon bonds so that their Yield to Maturity adjuststo newly appropriate levels.

y Liquidity Risk: There may not be a continuoussecondary market for a bond, thus leaving an investorwith difficulty in selling at, or even near to, a fair price.

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Risks in Corporate Bonds CONT..y Supply Risk: Heavy issuance of new bonds similar to

the one held may depress their prices.

y Inflation Risk: Inflation reduces the real value offuture fixed cash flows. An anticipation of inflation, or

higher inflation, may depress prices immediately.

y Tax Change Risk: Unanticipated changes in taxationmay adversely impact the value of a bond to investors

and consequently its immediate market value.