Corporate Bond

Companies issue bonds to raise money for expansion, acquisitions, refinancing existing debt or general operations. Bonds allow them to borrow large amounts, often for many years, from a wide range of investors.

Corporate bonds usually pay higher interest than government bonds, because companies are more likely to default. The extra yield over a comparable government bond is called the credit spread.

Credit rating agencies assess how likely a company is to repay and assign ratings. Bonds with high ratings are called investment grade. Bonds with lower ratings, from companies with weaker finances, are called high-yield or, less formally, junk bonds. They pay higher interest to compensate for greater risk.

For example, a financially strong company might issue a ten-year bond paying 5% when government bonds pay 4%, while a weaker company might need to offer 8% or more.

Corporate bondholders are paid before shareholders if the company runs into difficulty, but they do not share in the company's growth. Their return is limited to the interest and repayment of principal.