When one considers corporate bonds the risk factor is on the lesser side for sure. These bonds have a higher incidence of default for sure. The risk factor is a combination of various factors like the current market conditions along with the particular corporation who is issuing the bonds. If one finds the answer to the question on what is a corporate bond there is a clear cut clarity on the bond aspects as well as features. In the world of today companies are more into the issue of corporate bonds.
If one needs to understand what is a corporate bond then primarily these bonds are issued by corporations with the prime objective of raising up cash to take their business to the next level. In a way they resemble more of long term debt funds where the maturity is at least away from the date of issue. On the other side of the coin when one mentions the term commercial paper this means instruments which have a shorter maturity date. Sometimes the terms what is a corporate bond signifies the bonds which are issued by the various governments in their own respective currencies. In a way it strictly applies to those issued by corporations.
They are listed in all the major stock exchanges and are taxable . Despite the fact that it is traded in all the listed exchanges the trading of it takes place in a precise and concrete manner. Certain corporate bonds have the option of redemption before maturity and the issuer of it can redeem it before the maturity date. There are certain bonds known as convertible bonds which allow the issuers to convert the bonds into securities.
To look at another angle corporate bonds are issued by various private as well as public corporations and the companies issues such bonds to enhance their liquid capacity in the best possible way. This could be for a variety of reasons like buying a new plant, installation of new machinery or enhancement of the business. So how does a corporate bond work in the first place. It is the process where when one purchases a corporate bond, money is lend to the issuer for the purchase of the bond, For this the company gives an undertaking that they will pay the principal at a fixed date which is generally upon the maturity of the bond. Till the specified period when the bond matures the company pays you a fixed rate of interest which is calculated annually. The general notion is that corporate bond gives you an IOU from the company where one cannot have ownership interests in the company, just as one does so when they purchase stocks in a company.
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