Corporations issue bonds to raise money to expand their businesses, cover operating costs, or finance corporate takeovers or reorganizations.
Because corporations differ so dramatically from each other in terms of type and size, the risks associated with corporate bonds vary as well. Furthermore, the same company can issue more than one type of bond, so it's not always possible to assume that all of the securities from an individual company are equally creditworthy.
Corporate bonds also have certain risks that are not associated with government or agency bonds that are the result of the strength of the issuing company, the state of the economy, and the features of the bonds themselves. Because corporate bonds are generally riskier investments and provide no tax advantages, they tend to pay the highest interest rates.
The most common type of corporate bond is a debenture, which is backed by the full faith and credit of the corporation. Companies can also issue asset-backed bonds, which are backed by specific collateral, like a company's equipment or machinery.
The simplest form of corporate bond is referred to as a plain vanilla bond, which pays a fixed interest rate over a set period of time. Adding bells and whistles, or special features, is possible. For example, equity warrants give you the right to buy a company's stock at a certain price on a specific future date, and put options allow you to redeem your bonds at par value before they reach maturity.
Corporate bonds are taxed as regular income at federal, state and local levels.