# Corporate Bonds > Corporate bonds are loans to companies that pay interest above government bonds. Learn investment grade vs high yield, spreads, covenants, callable bonds and risks. Source: https://learn.tradelabsai.com/bonds-credit/corporate-bonds/ Track: Bonds, Rates and Credit · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Corporate Bonds", https://learn.tradelabsai.com/bonds-credit/corporate-bonds/ A corporate bond is a loan to a company. Companies issue bonds to fund operations, expansion, acquisitions and refinancing. Because companies can default, corporate bonds pay higher yields than government bonds of similar maturity, and that extra yield, the credit spread, compensates investors for credit risk and lower liquidity. The corporate bond market is huge, with trillions of dollars outstanding in the US alone, and it is a major source of funding for businesses of every size. ## Key features | Feature | Description | |---|---| | Issuer | A company, from blue chips to smaller firms | | Coupon | Usually fixed, sometimes floating | | Maturity | From 1 year to 30 years or more | | Seniority | Senior secured, senior unsecured, subordinated | | Covenants | Promises the issuer makes to protect lenders | | Call features | Many bonds can be repaid early by the issuer | | Rating | Credit quality assessment by rating agencies | ## Investment grade vs high yield | Category | Ratings (S&P/Fitch; Moody's) | Typical issuers | Spread over Treasuries | |---|---|---|---| | Investment grade | BBB minus or above; Baa3 or above | Large, stable companies | Lower | | High yield ("junk") | BB plus or below; Ba1 or below | Riskier or highly leveraged companies | Higher | The boundary between BBB and BB is important because many institutions can only hold investment grade bonds. A downgrade below that line, a "fallen angel", can force selling. See [Credit Ratings](https://learn.tradelabsai.com/bonds-credit/credit-ratings/) and [Investment Grade vs High-Yield Bonds](https://learn.tradelabsai.com/bonds-credit/high-yield-bonds/). ## Yield and spread ``` corporate yield = government yield of similar maturity + credit spread ``` **Example: Reading a corporate bond** A company's 10 year bond yields 5.6% when the 10 year Treasury yields 4.3%. The credit spread is 1.3 percentage points, or 130 basis points. If the company's outlook worsens and the spread widens to 200 basis points with Treasury yields unchanged, the bond's yield rises to 6.3%. With a duration of about 7.5, its price falls by roughly 7.5 × 0.7% ≈ 5.3%. See [Credit Spreads](https://learn.tradelabsai.com/bonds-credit/credit-spreads/) and [Duration](https://learn.tradelabsai.com/bonds-credit/duration/). ## Seniority and recovery If a company defaults, bondholders are paid in order of seniority: 1. **Secured debt** (backed by specific assets). 2. **Senior unsecured bonds.** 3. **Subordinated bonds.** 4. **Preferred and common equity** last. Historical studies by Moody's and S&P show average recovery rates of roughly 40% for senior unsecured bonds, with wide variation and lower recoveries for subordinated debt. See [Default Probability and Recovery Rate](https://learn.tradelabsai.com/bonds-credit/default-probability/) and [Bankruptcy and Restructuring](https://learn.tradelabsai.com/fundamentals/bankruptcy-and-restructuring/). ## Covenants Covenants limit what issuers can do, such as taking on more debt, paying large dividends or selling key assets. Investment grade bonds usually have few covenants; high yield bonds tend to have more. In recent years, weaker "covenant lite" structures have become common, especially in leveraged loans. ## Callable bonds Many corporate bonds are callable: the issuer can repay early, usually after a set date, often at a premium to par. Issuers call bonds when rates fall, so investors face reinvestment risk. Yield to call and yield to worst account for this. See [Yield to Maturity](https://learn.tradelabsai.com/bonds-credit/yield-to-maturity/). ## How corporate bonds trade Corporate bonds trade over the counter. In the US, trades are reported to FINRA's TRACE system, providing price transparency. Many bonds trade infrequently, so liquidity can be poor, especially in stress. Bond ETFs have become a popular way to gain diversified exposure and trade throughout the day. See [Bond Trading](https://learn.tradelabsai.com/markets/bond-trading/). ## Risks - **Credit risk:** default or downgrade. - **Interest rate risk:** prices fall when government yields rise. - **Spread risk:** spreads widen in recessions and crises. - **Liquidity risk:** hard to sell some bonds quickly at fair prices. - **Event risk:** leveraged buyouts or acquisitions can sharply raise a company's debt. In March 2020, corporate bond spreads widened sharply and liquidity dried up until the Federal Reserve announced corporate bond purchase facilities, an unprecedented step. ## Frequently asked questions ### What is a corporate bond? A debt security issued by a company that pays interest and repays principal at maturity. ### Why do corporate bonds pay more than Treasuries? Because companies can default and their bonds are less liquid, investors demand a credit spread above government yields. ### What is a fallen angel? A bond that was investment grade but has been downgraded to high yield, often forcing some investors to sell. Next, learn about tax advantaged local government debt in [Municipal Bonds](https://learn.tradelabsai.com/bonds-credit/municipal-bonds/). ## Continue learning - Next lesson: [Municipal Bonds](https://learn.tradelabsai.com/bonds-credit/municipal-bonds/) - Previous lesson: [Treasury Bills, Notes and Bonds](https://learn.tradelabsai.com/bonds-credit/treasury-bills-notes-and-bonds/) - Related: [Treasury Bills, Notes and Bonds](https://learn.tradelabsai.com/bonds-credit/treasury-bills-notes-and-bonds/): US Treasuries are bills, notes and bonds issued by the federal government. Learn their maturities, how auctions work, TIPS, how they trade and why they matter. - Related: [Credit Ratings](https://learn.tradelabsai.com/bonds-credit/credit-ratings/): Credit ratings from S&P, Moody's and Fitch grade the risk of default on bonds. Learn the scales, investment grade vs high yield, default rates by rating and limits. - Related: [Credit Spreads](https://learn.tradelabsai.com/bonds-credit/credit-spreads/): A credit spread is the extra yield a risky bond pays over a safe benchmark. Learn how spreads are measured, what drives them and what they signal about risk. - Related: [Investment Grade vs High-Yield Bonds](https://learn.tradelabsai.com/bonds-credit/high-yield-bonds/): High yield bonds are rated below investment grade and pay higher interest for higher default risk. Learn how they behave, default cycles, spreads and how to invest. - Related: [Default Probability and Recovery Rate](https://learn.tradelabsai.com/bonds-credit/default-probability/): Default probability is the chance a borrower fails to pay. Learn historical default rates, probabilities implied by spreads, the Merton model and recovery rates. - Related: [How Bonds Work](https://learn.tradelabsai.com/bonds-credit/how-bonds-work/): A bond is a loan that pays interest and returns principal at maturity. Learn coupons, price and yield, why prices fall when rates rise and the main bond risks.