Corporate debt

A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is usually applied to longer-term debt instruments, with maturity of at least one year. Corporate debt instruments with maturity shorter than one year are referred to as commercial paper.

The term "corporate bond" is not strictly defined. Sometimes, the term is used to include all bonds except those issued by governments in their own currencies. In this case governments issuing in other currencies (such as the country of Mexico issuing in US dollars) will be included. The term sometimes also encompasses bonds issued by supranational organizations (such as European Bank for Reconstruction and Development). Strictly speaking, however, it only applies to those issued by corporations. The bonds of local authorities (municipal bonds) are not included.

Corporate bonds trade in decentralized, dealer-based, over-the-counter markets. In over-the-counter trading dealers act as intermediaries between buyers and sellers. Corporate bonds are sometimes listed on (these are called "listed" bonds) and ECNs. However, vast majority of trading volume happens over-the-counter.

By far the largest market for corporate bonds is in corporate bonds denominated in US Dollars. US Dollar corporate bond market is the oldest, largest, and most developed. As the term corporate bond is not well defined, the size of the market varies according to who is doing the counting, but it is in the $5 to $6 trillion range.

The second largest market is in Euro denominated corporate bonds. Other markets tend to be small by comparison and are usually not well developed, with low trading volumes. Many corporations from other countries issue in either US Dollars or Euros. Foreign corporates issuing bonds in the US Dollar market are called Yankees and their bonds are Yankee bonds.

Corporate bonds are divided into two main categories High Grade (also called Investment Grade) and High Yield (also called Non-Investment Grade, Speculative Grade, or Junk Bonds) according to their credit rating. Bonds rated AAA, AA, A, and BBB are High Grade, while bonds rated BB and below are High Yield. This is a significant distinction as High Grade and High Yield bonds are traded by different trading desks and held by different investors. For example, many pension funds and insurance companies are prohibited from holding more than a token amount of High Yield bonds (by internal rules or government regulation). The distinction between High Grade and High Yield is also common to most corporate bond markets.

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Wikipedia