Intro to Corporate Bonds

There are many ways in which to grow your company or businesses and to stay competitive. One of those ways is to sell corporate debt (bonds). While smaller companies have to rely on the banking system, larger ones are able to issue bonds. A disadvantage of borrowing from the bank is the many restrictions placed on the borrower.

In terms of total face value of outstanding bonds, the corporate bond market is larger than each of the markets for municipal bonds, US treasury securities, and government agencies securities. In fact the total outstanding debt in the US is now at $34 trillion. That figure right there should give you some idea as to the importance of bonds in America, not to mention the rest of the world.

The role bonds play in our everyday lives is all encompassing. Every time you get in your car and back out of your driveway you are benefitting from bonds. When you drop your child off at school, it wouldn’t be there if not for school bonds that people like you vote for. When you opened up your laptop or turned on your desk top computer to view this article, you are benefitting from someone being able to sell debt (bonds). If you jump on a plane and fly to Asia you have probably benefitted in some way foreign bonds. Your library would not exist without existence of bonds.

Bonds are not purchased directly from the issuer, but rather a broker dealer at a bank or brokerage house. They buy the bonds from the issuers, then in turn resell them to investors like you and me. When the bond first comes out it is sold in the primary market. If you decide to sell your bond before maturity date it is sold in the secondary market.

Bonds are primarily bought and sold on the over-the-counter market (OTC) which is made from a network of independent national and regional dealers. There is not one organized exchange like the NASDAQ, for example.

Pricing has been a huge issue for years and it has only been in recent times with new laws that there has been any kind of visibility. In years past, primarily in the 1980’s many firms were making 60-70 cents on the dollar because no one had any idea of the debt instruments value or price.

The condition and the direction of the US economy is the biggest driver of interest rates and bond prices. Even though no one knows what the future holds, bond traders do profit when they are correct on their guesses. Bond market guys watch the economic indicators for some insight in the direction of interest rates and the expansion and retraction of the economy. When those expectations exceed or fall short, bonds move rapidly and there is money to be made trading.

So not only are bonds important to our cities and towns we live in and the maintaining of roads, schools, etc…they are also important to traders as well. There are many people who earn their living trading rather than investing for the future.

You have a huge variety of choices to choose from as well. You can focus on debt from specific industries you like, and shy away from those industries that you are not comfortable with. Like any bond, you have the choice coupon, maturity date, and credit quality, to name a few. Bonds are a great way to fund your retirement and to help secure your future.

In the mean time, good luck and happy investing.