Corporate Bond

From Open Risk Manual

Definition

Corporate Bond denotes a security issued by a (typically large) corporate to raise funds in capital markets (that is non-bank investors)

Bond Types

There is a variety of corporate bond characteristics:

  • Duration: Typically medium duration
  • Interest rate calculation: can be fixed or variable (floating) and reference various rates, even foreign currency rates
  • Priority in the capital structure of the borrowing firm (senior, subordinated)
  • Convertibility into Equity (embedded options)

Credit Risk

A primary risk with corporate bonds is credit risk. It is a type of corporate credit risk, namely the legal entity that may default on the bond is corporation, typically with limited liability. The obligations and legal framework that is applicable in the case of default or bankruptcy are determined by the laws governing the responsibilities of such commercial entities. These laws vary considerably from country to country

In common with other credit risk types, bond credit risk can be decomposed into Default Risk and Recovery Risk. The recovery value for a defaulted bond is typically determined on a market basis

Market Risk

Corporate Bonds are securities, thus more liquid (easier tradeable) than corporate loans. In a fixed income portfolio they are usually treated as spread product, that is fixed income positions that are sensitive to general interest rates and, in addition, a credit spread or premium

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