Corporate Bond

A corporate bond is debt issued by a company to raise money. Rather than borrowing from a bank, it borrows directly from investors, paying set interest and repaying the principal at maturity.

Yields exceed those on government bonds. Companies are more likely to fail than states, and that risk is compensated through higher interest — a difference called the credit spread.

Credit rating drives the yield substantially. A blue-chip issuer may pay only a point above government bonds, while a lower-rated company must offer far more.

The difference from equity is seniority. Bondholders receive only the agreed interest however well the company does, but rank ahead of shareholders if it fails — limited on both the upside and the downside.

For individuals, bond funds and ETFs are more practical than individual issues, since spreading across many companies means one default does not shake the whole holding. Maturity and credit rating determine the risk. Longer maturities swing more with rate changes, and lower ratings carry more default risk. Check both before choosing a product.