In terms of total face value of bonds outstanding, the corporate bond market is bigger than each of the markets for municipal bonds, U.S. treasury securities and government agencies securities.
Corporate bonds are debts issued by industrial, financial and service companies to finance capital investment and operating cash flow. Investors in corporate bonds have a wide range of choices when it comes to bond structures, coupon rates, maturity dates, credit quality and industry exposure. There are different types of corporate bonds, including floating rate, fixed rate, and zero coupon bonds.
Convertible bonds are corporate bonds that can be converted, at the investors discretion, into the common stock of the company. Convertible bonds are issued with a set conversion ratio. Based on the price of the company’s common stock, the investor may be better off converting the bond into common stock. Because there is a conversion feature, convertible bonds typically offer a lower interest rate than similar corporate bonds.
Investors need to understand what happens if a corporate bond issuer goes bankrupt and how changes in a company’s credit rating can affect its bond investors’ yields, among many other considerations.