Corporate debt
Also known as: corporate bonds
Corporate debt is money borrowed by corporations through securities like bonds, debentures, and commercial paper. Investors who buy corporate debt lend money to the issuer in exchange for interest payments and repayment of principal.
Corporate debt refers to the securities corporations issue when they borrow money from investors — most commonly bonds, but also notes and short-term commercial paper. Unlike stockholders, corporate bondholders are creditors, not owners: they receive scheduled interest payments and the return of principal at maturity, and they stand ahead of all stockholders if the company is liquidated.
Corporate debt divides into secured and unsecured issues. Secured bonds are backed by specific collateral — mortgage bonds by real estate, equipment trust certificates by equipment like aircraft or railcars, and collateral trust certificates by securities the issuer owns. Unsecured bonds, called debentures, are backed only by the issuer's full faith and credit, and subordinated debentures rank below them. Income bonds, the riskiest type, pay interest only if the company earns enough. Interest from corporate bonds is generally taxable at all levels — federal, state, and local — which distinguishes it from municipal and Treasury interest.
Corporate debt matters to investors because it typically yields more than government debt of similar maturity, compensating for credit risk. Ratings agencies grade issues from investment grade down to high-yield (junk), and most trading occurs over-the-counter in the secondary market, with trades reported through FINRA's TRACE system.
Corporate debt is a significant topic on the Series 6, Series 7, and Series 66 exams. Know the hierarchy of claims in liquidation, the difference between secured bonds and debentures, how corporate bonds trade, and the suitability profile of each debt type.
Key takeaways
- Corporate debt makes investors creditors of the issuer, with priority over stockholders in liquidation.
- Secured bonds (mortgage bonds, equipment trust certificates, collateral trust certificates) are backed by specific assets; debentures are unsecured.
- Corporate bond interest is generally taxable at the federal, state, and local levels.
- Corporate debt yields more than comparable government debt to compensate for credit risk.
- The Series 6, Series 7, and Series 66 exams test corporate debt types, liquidation priority, and suitability.