Corporate Bond

Debt instruments known as corporate bonds are issued by both private and public corporations.

Companies sell corporate bonds to raise funds for a range of projects, including the construction of new facilities, the acquisition of equipment, and business expansion.

Lending money to the “issuer,” or business that issued the bond, occurs when someone purchases a corporate bond. In return, the business guarantees to refund the funds, sometimes referred to as “principal,” on the designated maturity date.

The business typically pays us an agreed-upon interest rate up until that point, typically semi-annually. While a corporate bond offers an IOU from the corporation, unlike when one buys the company’s equity stock, it does not have an ownership interest in the issuing company.

Corporate bonds often appreciate during periods of low interest rates and depreciate during periods of high interest rates. The degree of price volatility often increases with maturity length.

Because one will get the par, or face value of the bond at maturity if they retain a bond until maturity, they may be less concerned about these price changes (also known as interest-rate risk, or market risk). The fact that bonds depreciate when interest rates rise and vice versa explains the inverse link between interest rates and bond prices:

When interest rates increase, new securities with higher yields than older securities are released to the market, depreciating the value of the former. Therefore, their prices decrease. When interest rates fall, new bond issuance have lower yields than older securities, increasing the value of the older, higher-yielding securities. Consequently, their prices rise. As a result, if a bond is sold prior to maturity, its value may be more or lower than what was paid for it.