Smart Bond Investing

Individual Bonds

 

Corporate Bonds


Bond Fact

The corporate debt market is approximately $6.3 trillion, making it larger than the U.S. Treasury bond and municipal bond markets combined.

Source: SIFMA

Companies issue corporate bonds (or corporates) to raise money for capital expenditures, operations and acquisitions. Corporates are issued by all types of businesses, and are segmented into major industry groups.

Corporate bondholders receive the equivalent of an IOU from the issuer of the bond. But unlike equity stockholders, the bondholder doesn't receive any ownership rights in the corporation. However, in the event that the corporation falls into bankruptcy and is liquidated, bondholders are more likely than common stockholders to receive some of their investment back.

There are many types of corporate bonds, and investors have a wide-range of choices with respect to bond structures, coupon rates, maturity dates and credit quality, among other characteristics. Most corporate bonds are issued with maturities ranging from one to 30 years (short-term debt that matures in 270 days or less is called "commercial paper"). Bondholders generally receive regular, predetermined interest payments (the "coupon"), set when the bond is issued. Interest payments are subject to federal and state income taxes, and capital gains and losses on the sale of corporate bonds are taxed at the same short- and long-term rates (for bonds held for less, or for more, than one year) that apply when an investor sells stock.

Sweeteners—Special Features that Often Come at a Price to Investors

In an effort to make bonds more attractive to investors, issuers sometimes add special features called "sweeteners" to a bond. For instance, one such sweetener is a survivor option, where the issuer agrees to repurchase the bond at par from the investor's estate in the event of death. Survivor options are not all alike and may contain limitations and special conditions. The insurance feature of insured bonds is another type of sweetener. Investors should understand that sweeteners almost always come at a price—either as a direct cost to investors or a lower rate of return.

Most corporate bonds trade in the over-the-counter (OTC) market. The OTC market for corporates is decentralized, with bond dealers and brokers trading with each other around the country over the phone or electronically. Some bonds trade in small quantities (or odd lots) in the centralized environments of the New York Stock Exchange (NYSE) and American Stock Exchange (Amex), and are also traded in the OTC market.
TRACE®Corporate Bond Trade Reporting Comes of Age

TRACE (the Trade Reporting and Compliance Engine®) was launched in 2002 to bring transparency to the corporate bond market and create a regulatory database of corporate bond information. TRACE enables individual investors to receive real-time information on the actual sale price of virtually all U.S. corporate bonds and to see intra-day transaction data, as well as aggregate end-of-day statistics (such as most active bonds, total volume, advances and declines and new highs and lows). All broker-dealers that FINRA regulates are required to report corporate bond transactions to the TRACE system.

Go to the TRACE Corporate Bond Data page for a snapshot of TRACE-reported corporate bond information.

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