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corporate Bonds These long-term bonds are issued by corporations with very strong credit ratings. The typical corporate bond sends the holder an interest payment twice a year and pays off the face value when the bond matures. Some corporate bonds, called convertible bonds, have the additional feature of allowing the holder to convert them into a specified number of shares of stock at any time up to the maturity date. This feature makes these convertible bonds more desirable to prospective purchasers than bonds without it, and it allows the corporation to reduce its interest payments because the bonds can increase in value if the price of the stock appreciates sufficiently. Because the outstanding amount of both convertible and nonconvertible bonds for any given corporation is small, corporate bonds are not nearly as liquid as other securities such as U.S. government bonds.
Although the size of the corporate bond market is substantially smaller than that of the stock market, with the amount of corporate bonds outstanding less than onethird that of stocks, the volume of new corporate bonds issued each year is substantially greater than the volume of new stock issues. Thus the behavior of the corporate bond market is probably far more important to a firm’s financing decisions than is the behavior of the stock market. The principal buyers of corporate bonds are life insurance companies; pension funds and households are other large holders
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