Corporate Bonds: How Companies Borrow from the Market
Corporate bonds are debt securities issued by companies to raise capital, priced as a spread over Treasuries reflecting credit risk — the primary alternative to equity financing.
Corporate bonds are debt securities issued by companies to raise capital, paying periodic interest (coupons) and returning principal at maturity. They are the primary alternative to equity financing for large corporations — borrowing from bondholders rather than diluting ownership by issuing shares. ## Credit Quality Bonds are rated by agencies (Moody's, S&P, Fitch): - **Investment grade** (BBB-/Baa3 and above): Lower yield, lower risk. Issued by stable companies. - **High yield** / "junk bonds" (below BBB-): Higher yield compensating for higher default risk. ## Pricing Corporate bonds are priced as a spread over equivalent-maturity The 10-Year Treasury Yield: The Most Important Interest Rate in the World — the "credit spread" reflecting the market's assessment of default risk. A bond yielding Treasury + 150 bps carries 1.5% extra yield for credit risk. ## Interest Rate Sensitivity Bond prices move inversely to interest rates. When rates rise, existing bonds with lower coupons become less attractive, and prices fall. Duration measures this sensitivity: a bond with 5-year duration loses roughly 5% in price for each 1% rate increase. ## Market Size The US corporate bond market exceeds $10 trillion outstanding — larger than the US equity market's annual trading volume. It's the channel through which How the Bond Market Controls Mortgages, Stocks, and Jobs.