What Are Corporate Bonds?
Corporate Bonds (also called corporates) are debt obligations, or IOUs, issued by private and public corporations. They are typically issued in multiples of $1,000 and/or $5,000.
Companies use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding the business. When you buy a bond, you are lending money to the corporation that issued it, which promises to return your money, or principal, on a specified maturity date. Until that time, it also pays you a stated rate of interest, usually semiannually. The interest payments you receive from corporate bonds are taxable. Unlike stocks, bonds do not give you an ownership interest in the issuing corporation.
Bond Basics How Big is the Market and Who Buys?
The corporate bond market is large and liquid, with daily trading volume estimated at $15 billion. Issuance for the first half of 2000 was an estimated $3.4 trillion. The total market value of outstanding corporate bonds in the United States at the end of the first half of 2000 was approximately $3.4 trillion.
Most corporate bonds trade in the over-the-counter (OTC) market, which does not exist in a central location. It is made up of bond dealers and brokers from around the country who trade debt securities over the phone or electronically. Market participants are increasingly utilizing electronic transaction systems to assist in the trade execution process.
Some bonds trade in the centralized environment of the New York Stock Exchange (NYSE), and American Stock Exchange (AMEX), but the bond trading volume on the exchanges is small. The OTC market is much larger than the exchange markets, and the vast majority of bond transactions, even those involving exchange-listed issues, take place in this market.
Investors in corporate bonds include large financial institutions, such as pension funds, endowments, mutual funds, insurance companies and banks. Individuals, from the very wealthy to people of modest means, also invest in corporates because of the many attractions these securities offer.