What is a Corporate Bond?

Simply it’s an IOU between a corporation and you.

Corporate bonds, Treasury bonds and Gilts all represent nothing more than a loan – or, if you wish, debt – for which the lender will be paid an interest rate, known as coupon yield. And this is why US/UK, Euro Treasuries or Gilts are considered the least risky bonds of all: you are lending money to Uncle Sam or similar and he’s got the best credit score in the universe.

After purchase, what you have done is loan either the government or a major corporation a sum of money, you are given two key facts – the amount of interest you will receive annually and the date your bond will mature. On that maturity date you will be given your money back – all of it; no question. And throughout the time you hold that bond or corporate bond, receiving, say, a 5 percent rate of interest, you have powers denied to the regular stockholder. In the great scheme of things, bondholders matter, with many carefully written covenants to protect them. Stockholders are cannon fodder. It the shares go up, they win. If the shares go down, no one cares.

But senior corporate bonds (prior claim in bankruptcy) or subordinate corporate bonds are just the ticket, because the large corporation that took our money is duty bound to give it back. Bondholders can have people hired and fired. If a few of them get together, they can throw out the board, unload the top executives. They can demand that the assets of the corporation be sold and they rate high on the pecking order for repayment if a corporation goes bankrupt.