What are you lending to when you buy a corporate bond?

A corporate bond is the same contract as a government bond with one crucial difference: the borrower can genuinely fail. That single change introduces everything distinctive about the corporate market — spreads, ratings, covenants, seniority.

The credit spread

A corporate bond yields more than a government bond of the same maturity and currency. The difference is the credit spread, and it is compensation for two things bundled together: default risk (you might not be repaid) and liquidity (a corporate bond is harder to sell quickly than a Treasury).

Worked example:

• 10-year government bond: 4.0%
• 10-year bond from a large, stable company: 5.0% → spread of 100 basis points
• 10-year bond from a smaller, heavily indebted company: 8.5% → spread of 450 basis points

Read the third line correctly. That 8.5% is not a better deal — it is the market saying "we require 4.5 extra points a year to hold this risk." The extra yield is the price of the uncertainty, set by people who have looked at the same balance sheet you have. High yield is a description of risk, never a discovery of free money.

Ratings: the shorthand

Rating agencies (Moody's, S&P, Fitch) publish letter grades that compress a credit view into a symbol. Two big buckets matter far more than the individual letters:

• Investment grade — BBB−/Baa3 and above. Considered relatively low default risk.
• High yield (colloquially junk) — BB+/Ba1 and below. Higher default risk, higher yield.

That boundary is not cosmetic. Many institutions are contractually prohibited from holding sub-investment-grade debt, so a downgrade across the line forces mechanical selling regardless of what any individual thinks — a bond dropping from BBB− to BB+ is a fallen angel, and the forced-seller dynamic around that line is real market structure, not folklore.

Ratings are opinions, published by companies paid by issuers, and they have been wrong at scale before. They are a starting point for your own reading, not a substitute for it.

Seniority: the queue inside the queue

You already know bondholders sit ahead of shareholders. Inside the debt stack there is a further ranking, and it decides who gets paid from a limited pot:

• Secured — backed by specific collateral. First claim on those assets.
• Senior unsecured — the standard corporate bond. General claim on the company.
• Subordinated / junior — paid only after senior debt is satisfied.

The same company can have three bonds outstanding at three different yields purely because of where they sit in this queue. Same issuer, same business, different position in the line at the door.

Covenants: the rules attached

Corporate bonds carry covenants — contractual restrictions on the borrower. Typical examples: limits on how much additional debt can be issued, minimum financial ratios to maintain, restrictions on selling major assets or paying large dividends. Breach one and the bond can become immediately repayable.

Covenants are the lender's substitute for control. A shareholder can vote; a bondholder can only write conditions into the contract in advance.

Optionality: callable bonds

Many corporate bonds are callable — the issuer may repay early, at a set price, after a set date. Notice who holds the option: the borrower. It will be exercised when it suits the borrower, which typically means after rates have fallen and the company can refinance more cheaply.

For the holder, this caps the upside from falling rates while leaving the downside from rising rates fully intact. Callable bonds therefore offer a higher yield than otherwise-identical non-callable bonds — that extra yield is the price of the option you sold to the issuer, whether or not you noticed selling it.

In the data

The US Treasury also publishes a corporate curve, built from high-quality (roughly AAA to A) company bonds and shaped like its own: a yield per maturity. The table is its 10-year point for the three newest months.

Subtract the 10-year Treasury yield from one of those figures and you have a credit spread for high-quality companies. Mind the calendar when you do: the corporate curve gives one figure a month, stamped on the first, while Treasury yields change every business day, so the two only line up month by month.

Try it now

1. Take one large borrower's long-term debt and interest expense and divide the second by the first for a rough average borrowing rate, then compare it with the Treasury yield at a similar maturity. That ratio is the average coupon on debt raised over many years, so its gap against today's Treasury yield mixes the rate levels of those issue years with credit; it can even come out negative when Treasuries yield more than the old coupons. A credit spread is one bond's market yield today minus today's benchmark at the same maturity. The ratio tells you what the company locked in; the gap is the value of having borrowed when it did. Verizon's balance sheet and income statement are below, then the newest Treasury curve; use its 10-year yield as the similar maturity.

2. Look at the same company's operating income, in the income-statement table above, and compare it to interest expense. The ratio (interest coverage) is one of the first things a credit analyst computes. Describe it; don't score it.
3. Write the seniority ladder from memory: secured → senior unsecured → subordinated → equity. That is the order of the queue when things go wrong.