Corporate Bonds To Buy is a topic that attracts many investors seeking higher yields than government securities, exposure to economic sectors, and opportunities for portfolio diversification; understanding these instruments is crucial before making selections or considering purchases.
Who This Is For & Suitability
Individuals and institutions seeking stable or enhanced income, willing to accept credit and liquidity risk greater than Treasuries or agency bonds.
Sophisticated savers aiming to diversify equity exposure, liability match, or balance interest-rate sensitivity (duration) in portfolios.
Investors comfortable with bond market mechanics: pricing, coupon flows, maturity and call features, and trade settlement.
Buy-and-hold investors focused on income predictability, as well as opportunistic traders targeting spread tightening in specific issuers or sectors.
Suitability determined by risk tolerance, investment horizon, liquidity preferences, and ability to monitor credit fundamentals.
Key Facts (At-a-Glance)
Item
Details
Issuer Type
Corporations: investment grade (rated BBB-/Baa3 or above) and high yield (“junk”). Sectors include industrials, utilities, financials, technology, etc.
Ratings
Standard & Poor’s, Moody’s, Fitch; grades from AAA (highest) to D (default). “Investment grade” vs. “high yield” (speculative).
Coupon Structure
Fixed, floating (tied to benchmarks), step-up, or zero-coupon; typical frequency semiannual in the U.S.
Call/Put/Sinking Fund
Many issues are callable (company can redeem before maturity); some have investor put options or sinking fund amortization (periodic partial repayments).
Covenants
Legal protections for investors: limit leverage, restrict asset sales, require reporting. Varies by deal and rating.
Minimum Denomination
Commonly $1,000 par (face value) increments in U.S. markets; some issues require larger lots.
Settlement
Standard for corporates in the U.S.: T+1 (trade date plus one business day); international markets may differ.
TRACE Visibility
Most corporate bond trades reported post-execution via the FINRA TRACE system for transparency.
Spread Quoting
Quoted in yield spread (“basis points”) vs. comparable U.S. Treasury; price as percentage of par (“clean price,” excludes accrued interest).
Liquidity
Varies; large, benchmark issuers have tighter bid-ask spreads than small issuers or off-the-run bonds.
From Prospectus to Secondary Trading
Corporations raise capital by issuing bonds, first described in detailed legal documents: the prospectus and offering memorandum.
Official filings in the U.S. are available through the SEC EDGAR database (official); these contain use of proceeds, risk factors, covenants, coupon, maturity, call/put schedules, and credit rating.
Primary issuance may involve a syndicate of investment banks underwriting and distributing bonds to institutional investors at a set price or via book-building.
Secondary market trading: after issuance, bonds trade over-the-counter (OTC) via dealer networks. Quotes expressed as price (percent of par) or as a spread (basis points above Treasuries of similar maturity).
Yield to Maturity (YTM): Return if held to maturity, assuming reinvestment of coupons at YTM rate and no default.
Yield to Worst (YTW): The lowest possible yield if the bond is called or matures on the nearest contractual date.
Current Yield: Annual coupon payment divided by clean price.
Spread to Treasury: Difference in yield (basis points) relative to U.S. Treasury securities of similar maturity; reflects credit risk, liquidity, and market sentiment.
Credit risk factors:
Credit Rating: Provided by agencies, signals issuer’s relative probability of default and loss severity in case of default.
Default Risk: Likelihood of missed payments, particularly significant in high yield (“junk”) bonds.
Downgrade risk: Worsening rating can hurt prices, even absent default.
Recovery rate: Percentage of principal recovered if bond defaults; varies by seniority and collateral.
Risk compensation: Higher spread and yield compensate for greater assumed risk in lower-rated issues.
Costs, Taxes & Accrued Interest
Trade costs: OTC trading involves bid-ask spreads as implicit trading costs, plus possible dealer markups/markdowns. “Sample/illustrative” markups range from 0.1%–1% depending on liquidity.
Commissions/platform fees: Vary by brokerage; some platforms charge per-bond or per-trade fees, while others include costs in spreads.
Accrued interest: Buyers pay seller interest earned since last coupon; received at next coupon payment. Price paid = clean price + accrued interest (the “dirty price”).
Original Issue Discount (OID): If issued below par, IRS may treat part of the OID as taxable income yearly.
Taxation: In the U.S., interest is taxed as ordinary income. Capital gains are taxed if bonds are sold above cost; losses may be deductible. Certain account types (e.g., IRAs) alter tax treatment.
Many corporate bonds are callable, allowing the issuer to repay before maturity after a set date, typically at a call premium or par.
Early redemption removes future coupons, exposing the investor to reinvestment risk—if market yields are lower at call, coupon income declines.
Yield-to-call and yield-to-worst measures help quantify risk; investors should always check for call schedules, make-whole provisions, and puttable features.
Some bonds include sinking funds, which stagger principal repayments and reduce extension risk.
Risks
Credit risk: Downgrade or default risk more pronounced in high-yield issues; events like mergers, leveraged buyouts can introduce event risk.
Liquidity risk: Secondary market depth varies greatly; less-liquid bonds may see large price swings or wider spreads, especially in stress environments.
Interest-rate risk: Prices fall when rates rise; measured by duration and convexity. Longer maturity, lower coupon bonds more sensitive.
Call/reinvestment risk: Callable bonds may be redeemed when rates fall, limiting upside and compounding reinvestment risk.
Structural subordination: Not all bonds stand equally in repayment—subordinated issues rank behind senior, secured tranches.
Sector and concentration risk: Overexposure to any single sector or issuer increases loss potential from adverse developments.
Alternatives & Comparisons
Feature
Corporate Bonds
Treasuries
Bond Funds/ETFs
Issuer Credit
Varies: IG to high yield; ratings key
Full faith and credit of U.S. government
Diversified (blend of underlying)
Coupon/Yield
Higher than Treasuries to reflect risk
Lowest (risk-free rate proxy)
Aggregated from holdings
Default Risk
Present, especially in HY segment
Minimal (Sovereign risk)
Spread across portfolio
Liquidity
Wide variation; large names most liquid
Very liquid
ETF: generally liquid; mutual fund: daily NAV
Price Transparency
Improved via FINRA TRACE
Full price discovery
Daily NAV (funds), intraday price (ETFs)
Minimum Investment
Often $1,000 par per issue
$100 minimum via TreasuryDirect; $1,000 on secondary
As low as 1 share (ETFs); $1,000+ (mutual funds)
Tax Treatment
Taxable interest (federal/state/local)
Exempt from state/local tax (U.S.)
Interest distributions taxable
How to Evaluate a Bond (Foundations)
Issuer’s credit profile, outlook, and leverage metrics.
Publicly available rating and any watchlist status or recent changes.
Covenants and structural protections: investigate prospectus/offering document.
Coupon type, call/put features, sinking fund schedule; how they affect YTM, duration, and convexity.
Bond duration and convexity; sensitivity to interest-rate changes.
Yield and spread vs. similar issues, peers in sector, and relative to yield curve.
Liquidity and TRACE trading volume; historical price range.
Tax implications (especially if OID or purchased at discount/premium); suitability for tax-advantaged accounts.
How to Evaluate Checklist
Issuer strength, sector outlook, and profitability.
Rating/watchlist status from agencies.
Prospectus review for call, put, sinking fund provisions.
Maturity ladder slot: does the bond fit portfolio needs?
Duration/convexity: align with interest rate scenario planning.
Yield and spread premium: peer and sector comparison.
Liquidity and recent TRACE trading activity.
Tax profile per IRS and official guidance.
Frequently Asked Questions
How do I find if a corporate bond is investment grade or high yield?
Check ratings from at least two agencies: BBB-/Baa3 or higher is investment grade, below is high yield.
Yes; investment grade issuers have low historical default rates, but high yield/junk issuers are more likely to default, especially in economic downturns.
Can I sell a corporate bond before maturity?
Yes, via brokers/dealers on the secondary market. Market price may differ from purchase price, potentially resulting in a loss.
Where can I see trade data and bond price transparency?
Corporate bonds can add yield, sector diversification, and non-equity income to portfolios, but require careful evaluation of credit and structure risk.
Review offerings and issuer filings on SEC EDGAR (official). Cross-check price/yield against comparable issues and monitor real-time prices and liquidity via FINRA TRACE (official).
Stay informed about current year regulatory developments and tax rules on the IRS official website.
Consider professional advice if navigating credit selection, tax status, or complex structures. Re-verify issuer fundamentals and documentation prior to purchase.
