Corporate debt (debt issued by corporations) can be classified in various ways. It can be classified in terms of maturity, the type, and the issuer’s credit quality.
In terms of maturity, there are short-term instruments like commercial paper, certificate of deposit, etc. The long-term instruments are called bond or long-term loans. In terms of type, there are syndicated loans, zero coupon bonds, bonds with embedded options, etc. Finally, corporate bonds can be classified as investment-grade or junk (HYG) based on the credit quality of issuers.
Corporate bond yields are often quoted as a yield on corresponding Treasury security plus a “Credit Spread” to compensate investors for additional credit risk that they are taking by investing in corporate bonds.
The intent of this series is to update our readers on how corporate debt and bond markets have performed over the past week, ending May 16.
Investment grade bonds
Investment grade bonds are those that are rated BBB- and above by Standard and Poors and Baa3 and above by Moody’s. Investment grade bonds are of medium-to-highest credit quality with AAA or Aaa being the highest rating that indicates highest safety. Very few corporations including Johnson & Johnson (JNJ) are rated AAA or Aaa by rating agencies. ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) invest strictly in investment grade corporate bonds while ETFs such as the Vanguard Total Bond Market ETF (BND) and the iShares Core Total U.S. Bond Market ETF (AGG) invest in the entire investment grade bond market including Treasuries.
To learn more about high-yield bonds and leveraged loans, continue reading the next part of the series.