A corporate bond is a loan from investors to a corporation, documented by an indenture — the legal contract specifying coupon rate, maturity date, par value, covenants, and trustee. Corporations issue bonds to finance operations, acquisitions, or capital expenditures. Interest payments (coupon) are a fixed corporate expense, making bonds senior to equity in the capital structure.
Corporate bonds are classified by credit quality: investment-grade bonds (rated Baa3/BBB- or higher by Moody's/S&P) carry lower yields and lower default risk; high-yield or junk bonds (below investment grade) offer higher yields to compensate for greater credit risk. Key risks include credit risk, interest rate risk (prices fall as rates rise), call risk (issuer redeems early in falling rate environments), reinvestment risk, and liquidity risk.
Bond structures vary: secured bonds are backed by specific collateral (mortgage bonds, equipment trust certificates); debentures are unsecured, backed only by the issuer's creditworthiness; subordinated debentures rank below senior unsecured debt. Callable bonds let the issuer retire debt early; putable bonds let the investor demand early redemption.
Yield measures include nominal (coupon) yield, current yield (annual interest ÷ market price), and yield to maturity (YTM) — the total return if held to maturity assuming reinvestment at the same rate. YTM is the most comprehensive measure.
> Exam tip: On the Series 7, know the inverse relationship between bond prices and yields, and master the priority in liquidation: secured creditors → senior unsecured → subordinated → preferred → common. Also recall that corporate bond interest is taxable at federal, state, and local levels — unlike municipal bond interest.