Corporate Bonds Rates
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Corporate bonds rates are the interest rates offered by corporate bonds. This rate of interest is called the bond rate or coupon rate. The interest rate offered by a corporate bond is impacted by changes in the supply of and demand for credit, inflation, the global economic scenario and credit risks.[br]
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Corporate Bonds Rates – Importance of Inflation
Even a minor fluctuation in the inflation rate can cause a substantial change in the corporate bond rates. When inflation rises, the returns from fixed income securities, such as corporate bonds, will decline substantially. This is because when inflation rises the cash value of your investment and interest decline. Similarly, when inflation falls, the cash value of the returns from corporate bonds will rise.
Corporate Bonds Rates and Treasury Debt
Corporate bond spread is the difference in yield between any corporate bond and a government bond of the same maturity. According to Arvind Krishnamurthy and Annette Vissing-Jørgensen, professors at Kellogg School of Management, the corporate bond spread is high when government debt is low. They believe that this negative correlation occurs due to variation in the “Convenience Yield” on Treasury securities. As treasury securities have a convenience value, investors value them beyond the cash flows. Investors bid up the prices of treasury securities compared to corporate bonds, leading to a fall in the yield on Treasuries below the corporate bonds rate. This scenario leads to a widening of the bond spread.
Corporate Bonds Rates and Benchmark Interest Rates
Bond prices and the benchmark interest rate are inversely related. When the benchmark interest rate is increased, the prices of existing corporate bonds will decline. This is because new corporate bonds will be available with a higher interest rate, which will exert pressure on the demand for older corporate bonds.[br]
Although US Treasury bonds or government bonds are much safer than corporate bonds, the yield is lower as well. Usually, investors opt for short term to medium term corporate bonds when there are substantial fluctuations in the benchmark interest rate. You can determine the corporate bond rates through corporate bond indices and projections of financial analysts. You will have to monitor the momentum of the bond indices keenly to get to know about the changing interest rates and the financial health of corporate bonds.