Corporate Bond Market is where Corporate Bonds are exchanged between issuers and investors. Corporate Bonds are the bonds issued by Corporations. Corporate Bond Market is the place, from where the corporations and companies raise capital by issuing corporate bonds. So, Corporate Bonds are used as the instrument of long term financing by the Corporations.
Basics of Corporate Bond
In the Corporate Bond Market, corporate bonds have generally term period or maturity period of 12 to 30 years. The maximum term period can exceed up to 50 even 100 years. The minimum term period has to be at least 1 year.
The Corporate bonds are taxable and traded through an exchange.
Different types of Corporate Bonds available in the Corporate Bond Market
Corporate bonds are offered in the Corporate Bond Market in following varieties:
There are some corporate bonds which come with the provision that the issuing corporation can pay back the principal sum to the bondholders even before the maturity date.
Some Corporate Bonds are Fixed Rate Bonds on which the issuer corporation pays interest at a fixed rate until maturity.
Some Corporate Bonds are Floating Rate Bonds. Interest to be paid on this type of bonds is determined by the floating market rate of interest. So, the interest amount keeps changing with the change in money markets.
Some corporate bonds are Zero-Coupon Bonds. Holders of this type of bonds get no regular interest payments. All the interests are accumulated and paid back with the principal amount on the maturity of the bond.
Convertible Bonds are also available in the Corporate Bond Market. These bonds can be converted into shares of common stock under certain conditions.
Functioning of Corporate Bond Market
In the Corporate Bond Market, the corporations can issue corporate bonds privately or they may appoint an investment bank to conduct a public offering in their behalf. If the corporations bestow the responsibility to the investment banks, then the banks can work in a few ways. The banks can purchase the bonds from the corporations with a strong commitment or standby agreement. Otherwise, the investment bank can also work as an agent and can sell corporate bonds to public with a guarantee of making the best efforts.
In the Corporate Bond Market, corporate bonds are generally “listed” on major exchanges. Some of these corporate bonds are issued and purchased through an exchange and some are traded in the dealer based over the counter markets.
Risk Involved in the Corporate Bond Market
The corporate bonds often pay higher rate of return compared to other bonds but are associated with high risk. So, investing in Corporate Bond Market is no doubt a high risk affair. But, the degree of risk varies according to the current market conditions and depending on the particular bond issuing corporation. The risk that the holder of Corporate Bond has to face is of two types. The bondholders are exposed to Interest Rate Risk which generates from the fluctuation of market rate of interest. Another type of risk is the Credit Risk. Credit Risk is nothing but the risk that the corporate issuer of the bond will default on the debt obligations. So, the safest way to invest in the Corporate Bond Market is to choose a suitable Corporate Bond Fund according to personal investment objectives and risk profile; because these funds spreads the money of investors over various corporate bonds to diversify the risk.