Question

Explain what is meant by "Market for Corporate Bonds "

Answer 1

To better understand the "Market for Corporate Bonds", let's bifurcate the phrase and try to understand the term - "Market" and "Corporate Bonds" separately and then make sense out of the whole phrase.

A Market is a nominal or real place where buyers and sellers interact (directly or indirectly through intermediaries) and the forces of supply and demand operate, to trade or exchange goods, services, contracts, etc. And it is not necessary to have a common exchange of medium to do the trade.

Now, let us understand what corporate bonds are. A Corporate Bond is a financial instrument created by companies in order to raise capital. This capital is then utilized by the companies to run their day to day operations, business expansion, acquiring other firms, paying off older and/or expensive debts, etc. In short, selling corporate bonds is relatively easier and quicker way to raise capital. The buyer of corporate bonds receives principal along with the interest at a predecided interest rate at the time maturity, which is called as bond yield. But if the bond buyer sells the bonds before maturity, they may not receive the same price back that they paid for it due to fluctuation in interest rates. Bonds are majorly classified based on the duration, yield based and type of interest payment based.

Now that we individually understand the terms Market and Corporate Bonds, let's try to understand the Market for Corporate Bonds. In simplified terms, it is just a nominal or real place where corporate bond sellers like companies or traders sell the bonds to the buyers like other companies/traders, etc. The Corporate Bond Market mainly includes corporate debt securities, facilitating the exchange of bonds against money. There are two types of market for Corporate bonds called Primary Market, where new debt is issued by the companies and another type of market is a Secondary market, where debt securities are traded. The participants in this kind of market include traders, institutions, individuals, etc. The Market for Corporate Bonds provides a way to attain long-term financial aid for executing various objectives of the firm.