A bond in business is a debt contract: a company borrows money from investors at a stated interest rate for a fixed period, pays interest along the way, and returns the principal when the bond matures. Most corporate bonds carry a face value of $1,000 each, and companies issue them in large batches to raise millions or billions at a time. Selling bonds lets a company bring in capital without handing out ownership the way issuing stock does, and the interest it pays is generally tax-deductible, which makes bonds one of the cheaper ways to fund growth.
The Core Terms of the Deal
Every bond is defined by a few numbers. The par value, also called face value, is what the company promises to repay at the end. For corporate bonds that figure is almost always $1,000. The coupon rate sets the annual interest payment as a percentage of par value, so a 5% coupon on a $1,000 bond pays $50 a year, usually split into two $25 payments. The maturity date is when the principal comes back. Corporate bonds commonly run 5 to 30 years, though shorter and longer terms exist.
Those terms sit inside a legal contract called an indenture. The Trust Indenture Act of 1939 requires any corporate bond sold to the public to be issued under an indenture meeting specific federal standards, including the appointment of an independent trustee who looks out for bondholders.1Office of the Law Revision Counsel. 15 USC Chapter 2A, Subchapter III – Trust Indentures In normal times the trustee handles routine duties like distributing interest payments and tracking compliance. If the company defaults, the statute requires the trustee to act with the care a prudent person would use managing their own affairs.2Office of the Law Revision Counsel. 15 US Code 77ooo – Duties and Responsibility of the Trustee
Covenants
Indentures typically include covenants that restrict what the company can do while the debt is outstanding. Negative covenants might stop it from piling on additional debt, selling off major assets without using the proceeds to repay bondholders, or paying excessive dividends. Financial covenants often require the company to keep ratios like debt-to-income inside set limits. Violate a covenant and the trustee can declare a default and accelerate repayment of the whole issue.
Types of Corporate Bonds
Companies issue bonds in several structures, each shifting risk and return differently.
- Secured bonds are backed by specific company assets like real estate, equipment, or receivables. If the company fails to pay, bondholders have a direct claim on that collateral, which usually translates into a lower interest rate.
- Unsecured bonds, called debentures, rest only on the company’s overall creditworthiness. No specific assets are pledged, so debentures normally carry higher coupon rates than secured bonds from the same issuer.
- Convertible bonds give investors the right to swap their bonds for a set number of company shares at a predetermined price. The upside potential lets the company offer a lower coupon; investors accept less current income in exchange for a shot at stock gains.
- Callable bonds let the company repay the bond before maturity, usually at a slight premium over par. Companies call bonds when interest rates drop so they can refinance cheaper. Investors get their money back sooner than planned and may struggle to replace the yield.3U.S. Securities and Exchange Commission. Callable or Redeemable Bonds
- Zero-coupon bonds pay no periodic interest. Investors buy them at a deep discount and receive the full face value at maturity. A 20-year zero-coupon bond with a $10,000 face value might sell today for roughly $3,500. The IRS treats the annual increase in value as taxable income each year, even though no cash changes hands until the bond matures.4FINRA. The One-Minute Guide to Zero Coupon Bonds
Why Companies Issue Bonds Instead of Stock
The biggest draw is tax treatment. Interest paid on corporate debt is deductible from the company’s taxable income under federal law.5Office of the Law Revision Counsel. 26 USC 163 – Interest A company in the 21% corporate bracket paying $10 million in annual bond interest effectively reduces the after-tax cost of that interest to about $7.9 million. Dividends paid to shareholders are not deductible. Bonds also raise capital without diluting existing owners, since bondholders are lenders, not part-owners.
The deduction has limits. Section 163(j) of the Internal Revenue Code caps the annual deduction for business interest at 30% of adjusted taxable income. For tax years beginning in 2026, adjusted taxable income is calculated before depreciation and amortization are subtracted, which makes the cap more generous than it was during the stretch when depreciation was excluded. Small businesses with average annual gross receipts of $32 million or less over the prior three years are exempt from the cap. Any disallowed interest carries forward, so the deduction is delayed, not lost.
Zero-coupon issuers face extra reporting. Because these bonds are sold at a discount, the IRS treats the annual accretion as original issue discount, and publicly offered OID bonds require the issuer to file Form 8281 with the IRS within 30 days of the issue date.6eCFR. 26 CFR 1.1275-3 – OID Information Reporting Requirements
How a Company Issues a Bond
SEC Registration
Federal securities law requires a company to register a public bond offering with the Securities and Exchange Commission before any sales. The registration statement includes audited financial statements, a description of the business and its management, how the proceeds will be used, and the specific risk factors investors should weigh. First-time or smaller issuers file on Form S-1, which demands full disclosure. Larger companies already reporting to the SEC can use Form S-3, a streamlined shelf registration that lets them issue in batches over time. Qualifying for the shortcut requires a public float above $75 million, a clean record of timely SEC filings, and no missed debt or dividend payments in the prior 12 months.
Underwriting
Once registration is ready, the company hires one or more investment banks to underwrite the offering. In a firm commitment deal the underwriters buy the entire issue from the company at an agreed price and then resell to investors; the company gets its money regardless of how the resale goes, and distribution risk shifts to the banks. In a best-efforts arrangement the underwriters act more like sales agents, promising only to try to place the bonds. Firm commitment dominates large corporate issuances because both sides prefer the certainty.
Pricing
The final coupon rate and offering price turn on the company’s credit rating, prevailing market interest rates, the bond’s maturity, and investor appetite. Strong demand during the marketing period, sometimes called a roadshow, can push the final coupon below where it started. Once priced, the bonds are sold and begin trading.
Credit Ratings
Before a bond reaches investors, rating agencies grade the issuer’s financial health to signal default risk. The major agencies use letter-based scales where ratings at or above BBB- (or the equivalent) are considered investment grade and anything below falls into high-yield, sometimes called “junk.”7SEC.gov. The ABCs of Credit Ratings Investment-grade companies borrow at lower rates because the market sees them as safer. High-yield issuers pay more to compensate investors for elevated risk.
The issuing company pays for its own rating. This issuer-pays model has drawn criticism for creating potential conflicts of interest, but it remains the industry standard.7SEC.gov. The ABCs of Credit Ratings Ratings aren’t one-time events. Agencies monitor the issuer across the life of the bond and can upgrade or downgrade. A downgrade can push the bond’s market price down overnight, and many institutional investors are required by their own rules to sell any bond that drops below investment grade.
After the Issuance: Trading and Reporting
Bonds don’t sit untouched until maturity. Investors buy and sell them on the secondary market, which for corporate bonds runs almost entirely over-the-counter rather than on a centralized exchange. Trades happen directly between buyers and sellers, usually through broker-dealers. Pricing transparency improved after FINRA introduced TRACE, which requires broker-dealers to report corporate bond trades within 15 minutes of execution.8FINRA. Trade Reporting and Compliance Engine (TRACE)
A bond’s market price moves with interest rates, the issuer’s credit quality, and the broader economy. When market rates rise, existing bonds with lower coupons look less attractive and their prices fall; when rates drop, older bonds with higher coupons gain value. For the issuing company, that secondary-market movement doesn’t change cash flows. The same interest payments go out and the same principal comes due regardless of what the bonds trade for in between.
Issuing bonds to the public also commits the company to ongoing SEC disclosure. Annual reports on Form 10-K include audited financial statements, management’s discussion of financial condition, and descriptions of material risks.9SEC.gov. Form 10-K Quarterly reports on Form 10-Q cover the first three fiscal quarters and must disclose any default on debt or breach of a material covenant on indebtedness exceeding 5% of total consolidated assets.10SEC.gov. Form 10-Q These filings give bondholders a steady window into whether the company can keep paying.
What Happens If the Company Can’t Pay
Default can mean anything from a missed interest payment to a covenant violation. When one hits, the indenture trustee’s role turns adversarial. The trustee can accelerate the debt and demand immediate repayment of the full principal. In practice, most defaults don’t produce instant repayment because the company doesn’t have the cash, which is why it defaulted in the first place.
Bankruptcy Priority
If the company files for Chapter 11, bondholders become creditors in a court-supervised restructuring, and the payment hierarchy matters. Secured creditors, including holders of secured bonds, get first priority up to the value of their collateral. Unsecured bondholders stand behind secured creditors but ahead of shareholders. Under the absolute priority rule, shareholders receive nothing under a reorganization plan unless every creditor class above them is paid in full or consents to a different arrangement.11Office of the Law Revision Counsel. 11 US Code 507 – Priorities
Bondholders whose claims are impaired, meaning the plan proposes paying them less than the full amount owed, get to vote. A class accepts a plan only if holders of at least two-thirds of the dollar amount and more than half the individual claims in that class vote yes. Unsecured bondholders can also work through creditors’ committees that consult with the company during the restructuring and investigate how the business has been run.12United States Courts. Chapter 11 – Bankruptcy Basics
Recovery varies widely. Secured bondholders often recover a large share of their investment because they hold claims on specific assets. Unsecured bondholders are less predictable; they might recover 40 cents on the dollar in one restructuring and nearly nothing in another, depending on how much value is left after secured claims are satisfied. That gap is why secured bonds carry lower interest rates in the first place: investors accept less income because they face less downside.