Wednesday, May 6, 2009

corporate bonds

corporate bonds are bearer securities issued by corporate borrowers with maturities typically of 5-7 years. They can be issued by way public issue private placement and can carry either a fixed or floating interest rate coupon.
In mature and sophisticated capital markets, Such as the US,UK and Europe, investors have the benefit of strong market regulation and rating agency assessments of the credit risk involved in these securities. Rating agencies typically insist on bank back up lines being in place to redeem the securities in the event of a liquidity shortage. In short, investors are protected and well informed about the risks they are taking.
However, commercial paper and corporate bonds are now being issued by corporates in other markets where such protections are not available and there have been some significant investor losses as a result. A proper and comprehensive rating exercise on a company is an expensive business and does not make financial sense to cover relatively small amounts of borrowing. One of the reasons banks exist as intermediaries in loan transactions is because they have specialist skill and experience in credit assessment that is beyond the normal investor. In smaller markets and for smaller companies wherever they are, the need for traditional lending skills is as strong as ever.

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