Corporate bonds are bonds issued by a corporation so that the corporation will be able to raise money when it needs to expand its business. The term is typically applied to longer-term debt instruments that have a maturity date of at least one year. A shorter term corporate bond is sometimes known by the term “commercial paper.”
The term “corporate bond” is sometimes inaccurately used to refer to any bond that is not issued by a government. However, when the bond is not issued by an actual corporation, the bond should not technically be known as a corporate bond. Bonds of local authorities or supra-national organizations are never considered to be known as corporate bonds.
Often, a corporate bond will be listed on major exchanges, in which case the corporate bond becomes known as a listed bond. The coupon, or interest payment, of corporate bonds are usually taxable. However, in some cases a corporate bond may have a zero value coupon with a high redemption value. Despite being available on exchanges, most corporate bond trading is decentralized, dealer-based, and performed in over-the-counter markets.
A corporate bond may feature an embedded call option, which allows the corporate bond to be redeemed before its maturity date, though others offer the opportunity to transform the corporate bonds into equity.