Interest-producing investments
Corporate Bonds
Loans to companies, documented by an indenture, paying a fixed coupon twice a year and ranking ahead of the company's stock in a bankruptcy.
A corporate bond is a debt security issued by a company, governed by a contract called an indenture and administered by a trustee on behalf of bondholders. It normally pays a fixed semiannual coupon and repays face value at maturity, and it sits above preferred and common stock in the capital structure. Yields are quoted as a spread over comparable Treasuries, and that spread is the market's price for the issuer's credit risk.
Interest from lending Truly passive
The labels above place this income type before you read a word. The first is the mechanism — how the money actually reaches you, whether by lending it out, owning a slice of something, renting an asset, licensing a right, selling an option or owning a business somebody else runs. The second says whether the income keeps arriving on its own once it is running, or whether it needs work from you to keep coming. Both are descriptions of how the thing is built, not verdicts on it.
How it works
A corporation raises money by selling bonds to investors, and the terms of that loan live in an indenture, a contract that names a trustee to act for bondholders, sets the coupon and maturity, and defines what counts as a default. The trustee does not manage your investment; its job is limited to enforcing the indenture if the issuer breaches it.
Seniority is what determines who is paid first if the company fails. Secured bonds have a claim on specific collateral and are paid from it before anyone else; senior unsecured bonds come next, then subordinated debt, then preferred stock, then common equity. Two bonds from the same issuer can have very different recovery outcomes depending on where each sits in this stack.
Covenants are restrictions written into the indenture that limit what the company can do while the bonds are outstanding — how much more debt it can take on, whether it can sell major assets, how much it can pay out in dividends. Breaching a covenant can let the trustee or a bondholder vote accelerate the entire debt, demanding immediate repayment even if every coupon has been paid on time.
Rating agencies — Moody's, S&P, Fitch — assign letter grades that summarize this credit risk. The line between investment grade and high yield sits at BBB−/Baa3, and many institutional mandates are written around that line. Most corporate bonds are also callable, and many carry a make-whole provision requiring the issuer to pay a price based on the present value of remaining coupons if it redeems early. All of this trading activity, once executed, is reported by CUSIP to FINRA's TRACE system, making actual trade prices public.
What it pays
A corporate bond's return is quoted as a yield to maturity, or a yield to worst when a call could cut the bond's life short, and it is expressed in the market as a spread in basis points over a Treasury of matching maturity. That spread is compensation for three distinct things: expected default losses, the cost of illiquidity relative to Treasuries, and the risk that the spread itself widens before you sell.
The spread moves far more than the coupon does, and it moves differently depending on credit quality. Investment-grade spreads track macro conditions — growth expectations, monetary policy, overall risk appetite. High-yield spreads track default expectations directly and can move violently once a downturn starts to look likely, well before any actual default occurs.
Duration and credit risk interact. A long-dated investment-grade bond behaves partly like a Treasury bond, moving with interest rates; a short-dated high-yield bond behaves more like a claim on the company's operating results, moving with equity sentiment. Coupons are usually fixed and paid twice a year, though floating-rate notes reset periodically off a reference rate such as SOFR plus a fixed spread.
The coupon printed on the bond is not the return. A bond bought above face value (par) yields less than its coupon; one bought below par yields more. Only the purchase price relative to future cash flows determines the actual yield.
Costs and taxes
Retail investors buying individual bonds typically pay a dealer markup embedded in the quoted price rather than a stated commission. Comparing the quote to recent TRACE-reported trades in the same CUSIP is the practical way to see how large that markup is.
Buying a bond between coupon dates requires paying the seller accrued interest for the period since the last coupon; that amount comes back in the next coupon payment and is netted out for tax purposes, so it is not itself a cost.
Interest is ordinary income for federal tax and is normally taxable at the state level as well — unlike Treasury interest, corporate bond interest gets no state tax exemption. A bond issued below par generates original issue discount, which accrues as taxable interest annually even though no cash changes hands until maturity or sale.
Selling above adjusted cost basis produces a capital gain; selling below produces a capital loss. A default followed by a restructuring produces a loss whose tax character depends on how the workout is structured — an exchange, a bankruptcy plan, or a straight write-off each treat the loss differently. Because coupon income is fully taxable at ordinary rates, corporate bonds are commonly held inside tax-deferred accounts, where that treatment carries no current cost.
Liquidity and time commitment
Corporate bonds trade over the counter through dealer networks rather than on a centralized exchange, and liquidity depends heavily on the specific issue. A large, recently issued benchmark bond from a well-known issuer trades often and tightly; a small, seasoned issue from a less-followed company can sit for days without a two-sided quote.
Bid-ask spreads widen sharply during market stress — precisely the moment a holder is most likely to want to sell. Holding to maturity sidesteps this problem entirely, since price fluctuations along the way do not matter if the issuer pays principal and interest as contracted; maturity is the built-in, contractually defined exit.
Bond funds and ETFs offer daily liquidity on the same underlying instruments, but they trade a perpetual, rolling portfolio with no maturity date of its own, so the fund's price risk never resolves the way an individual bond's does at redemption.
Ongoing effort for a bondholder is not trading but monitoring — issuer earnings, rating actions, and any tender or exchange offers, which typically arrive with short response deadlines that require attention even in an otherwise passive holding.
How it goes wrong
Default is the central risk: the issuer misses an interest or principal payment, or breaches a covenant that triggers acceleration. Recovery in that event depends heavily on seniority — senior secured lenders often recover a meaningful fraction of face value, while subordinated holders can recover very little or nothing.
A downgrade from investment grade into high yield, known as becoming a fallen angel, forces selling by funds whose mandates forbid holding below-investment-grade debt. That selling pressure can drive the price down well before any missed payment actually occurs.
Spread widening alone, without any change in the issuer's ability to pay, produces a mark-to-market loss on the bond's price — every coupon can arrive on schedule and the holding can still be worth less. Interest-rate risk compounds this: a long-dated investment-grade bond can fall hard purely because Treasury yields rose, independent of the issuer's credit.
Call risk cuts off the upside case: an issuer typically redeems bonds early when its credit has improved or rates have fallen, which is exactly when a holder would have wanted to keep collecting the higher coupon. And in distress, issuers sometimes run coercive exchange offers or out-of-court restructurings that leave holders who decline to participate structurally subordinated to those who accepted the exchange.
What to remember
- A corporate bond is a loan governed by an indenture, ranking above preferred and common stock, with repayment depending on the issuer's credit and where the bond sits in the capital structure.
- Yield is quoted as a spread over Treasuries, and that spread — not the coupon — is the market's live price on default risk, illiquidity, and credit-cycle sentiment.
- Interest is ordinary income, fully taxable federally and at the state level, which makes tax-deferred accounts a common home for corporate bond holdings.
- Liquidity is over the counter and uneven — strong for large recent issues, weak for small seasoned ones, worst exactly when markets are stressed.
- Most corporate bonds are callable and many carry make-whole provisions, so the good scenario for the issuer often cuts short the good scenario for the holder.
- Seniority, covenants, and rating actions determine recovery in default far more than the stated coupon does.
This page explains how the income type works, which does not change from week to week, so it deliberately carries no rate and no price. The links below go to the pages that hold the current figures for it, each one stamped with the date the data was pulled. Read the mechanism here first: the numbers there are far easier to judge once you know what they are measuring.
See the live numbers: Bonds.
Frequently asked
What does investment grade actually mean?
How do bondholders rank against shareholders?
Why does my bond's price change if the company is fine?
Where can I see what a bond actually traded at?
Written for information only. Nothing here is investment, tax or legal advice, and no page on this site recommends buying or selling anything. Rules and tax treatment change; verify anything that matters with a professional who knows your situation. This explainer was drafted by a language model (claude-sonnet-5) from an editor-approved outline and fact sheet, under the rules set out in our editorial policy, and carries no market figures. Last updated Jul 29, 2026.