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Corporate bond

Debt issued by a company, paying a coupon above the government yield of the same maturity to compensate for default risk and worse liquidity.

A corporate bond is a Treasury plus a credit spread. That decomposition is how the market thinks about it: the government leg carries interest-rate-risk, the spread leg carries default and liquidity risk, and the two can move in opposite directions on the same day.

The market splits into investment-grade and high-yield at the BBB minus / BB plus boundary, and the two behave differently. Investment grade trades mostly on rates; high yield trades mostly on equity-like default risk.

Example: a 10-year Treasury yields 4.20% and a BBB rated industrial bond yields 5.35%. The credit-spread-bonds is 115 basis points. If Treasuries rally 20 basis points and the spread widens 20, the corporate bond's yield is unchanged.

Related: credit-spread-bonds, investment-grade, high-yield, spread-duration, covenant

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.

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