Most companies at some time need to borrow large sums of money to finance their operations, and it is vital that they try to do so to their best advantage, e.g. at the lowest cost, with an optimum mix in terms of maturity dates and with an acceptable pattern of cash outflows.
If a company finds that it needs extra debt capital to operate successfully, one of the ways it can source the capital is by issuing corporate bonds. These bonds are simply IOUs issued by the company and bought by investors who, in return for lending the company their money, receive interest payments (usually) and payment of the principal amount at a set time.
In general, corporate bonds offer a higher rate of return than reputable government bonds but as you might expect, this comes with a greater degree of risk of failure to pay what was agreed. Having said that, because many governments are less reputable than some companies within the country, corporate borrowing can be at lower rates of return than that of their governments. Corporate bonds are generally issued with a coupon (usually taxable) paying a set amount annually or semi-annually, and their yield is calculated in the same way as government bonds. Most corporate bonds are medium to long dated and are rarely more than 20 years.Corporate bonds can be a very useful way for companies to raise money without issuing equity, which brings the possibility of losing a degree of control over the company, or accepting the constraints imposed by bank lenders. Issuance depends on investors and corporate managers having confidence in the economy and in the prospects for the specific company as well as the interest rate level. Investor appetite for corporate bonds ebbs and flows, as does managerial confidence in the benefits of additional debt. Sometimes, as in August 2013, there is great economic uncertainty and a considerable drop in the amount being issued - see Article 4.1.