A corporate bond is a type of debt security issued by a company to raise capital. Investors who buy the bond lend money to the company in exchange for periodic interest payments and the return of the principal at maturity.
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A corporate bond allows companies to borrow money from investors.
Companies issue corporate bonds to finance operations, expand their business, or invest in new projects. In return, they agree to pay interest, known as the coupon, at regular intervals and repay the original investment at the end of the bond’s term. Corporate bonds generally offer higher yields than government bonds because they carry more risk, including the possibility that the company may fail to meet its payment obligations. The risk level depends on the financial strength of the issuing company and is often reflected in its credit rating.
Short example:
Suppose a company issues a corporate bond with a face value of $1,000 and an annual interest rate of 5 percent.
An investor who buys the bond receives $50 per year in interest payments.
At maturity, the investor receives the original $1,000 back.
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