Corporate Debt

Corporate Debt Instruments
Corporate debt instruments are financial obligations that take precedence over stock (preferred and common) in instances of bankruptcy.

Corporate debt outstanding is at $8 trillion as of 2014.

Corporate Bonds
Four general classifications: 1. Public utilities, 2. Transportation, 3. Banks/finance, and 4. Industrials
 * Issuer (corporation) agrees to pay a percentage of par on designated dates
 * Evaluated based on issuer’s potential to deliver payments. This process is called credit analysis. There are three major ratings agencies: Moody’s, Standard & Poor’s, and Fitch Group.
 * Bonds will either be rated investment grade or non-investment grade (junk bonds). Junk bonds offer higher interest rates, but are a riskier proposition.

Medium-Term Notes
Instruments offered on a continuous basis; generally maturity ranges from nine months to 30 years.

Commercial Paper
Short-term and unsecured; under 270 days of maturity in order to avoid registering with the Securities and Exchange Commission -- a process both time consuming and expensive.

Asset-backed Securities
Asset-Backed securities have become popular because they are relatively safe investments with higher interest rates than Treasury securities.
 * Created by combining loans – a process known as securitization.


 * Credit enhanced – bond insurance and reserve funds are often used as collateral to boost credit ratings.

Asset-Backed Securities were controversial during the Great Recession (often, internal loans were not evaluated properly, leading to faulty credit ratings – the Dodd-Frank Act now requires reporting of information regarding specific loans within an Asset-Backed Security).