Group 2
IAS282
Corporate Dept
A. Definition and general properties of the asset class.
Debt is money that has been borrowed by other companies or individuals. It is also a financial tool used by
enterprises as leverage when borrowing or making purchases. (Investopedia, Corporate debt) This asset class is
used to raise funds for business endeavours. It is a significant asset class in the larger financial environment
since this gives businesses access to the capital they need. This is typically raised through issuing bonds, loans,
treasuries, or other debt instruments to financial institutions.
B.
The typical issuers/managers of these instruments.
1. Corporations: Corporations are the primary issuers of corporate debt. Debt is issued to raise
funds for various purposes such as investment, expansion, or refinancing existing debt. (CFI,
2022)
2. Investment Banks: Investment banks and financial institutions help bring the issuers and
investors together, the assist corporations in distributing and structuring their debt
securities. (Chen, 2023)
3. Investors: Various institutional and individual investors lend money to the issuing
corporations in exchange for interest payments and the return of the principal amount at
maturity.
4. Bondholders and Trustees: Bondholders are the individuals or entities that hold the debt
securities. Trustees represent the interests of bondholders and ensure that the terms of the
debt agreement are maintained.
C. Typical cashflows of the asset class
1.
Interest Payments: The issuers of corporate debt are required to make regular interest
payments to their bondholders/creditors. (Guberti, 2023) The cost of borrowing is reflected in
interest payments and are usually paid semi-annually or annually.
2. Principal Repayment: The borrowing firm is required to pay back the principal sum to investors
when the loan matures. (Donaldson, Corporate debt capacity) The
3. Amortization Payments: If corporate bonds have amortization schedules, the principal is repaid
regularly over the period of the bond instead a single lump sum.
D. Main risks involved in investing in the asset class.
1. Credit Risk: Investors should carefully assess the inherent risks associated with investing in
corporate debt. Since there is a chance that the issuing corporation could stop making
payments on its loan, credit risk is a major worry. (Hayes, 2023)
2.
Interest Rate Risk: The financial stability of issuers and their capacity to make payments on
schedule can be impacted by market circumstances, economic downturns, and fluctuations
in interest rates. (Donaldson, Corporate debt capacity)
3. Liquidity Risk: Some corporate bonds may be less liquid and investors who want to sell
bonds before maturity might have difficulty finding buyers at desired prices.
4. Inflation Risk: If inflation rises, the purchasing power of the fixed interest payments received
from corporate bonds can be eroded, reducing the real return on investment.
Group 2
E.
IAS282
The investors that would be interested to invest in the asset type
1. Individual Investors: Individual investors often include corporate bonds in their investment
portfolios because it can provide a probable stream of interest payments, which is attractive
for those requesting stable returns.
2. Institutional Investors: Institutional investors, such as pension funds, insurance companies,
and endowments, invest in corporate debt to match their long-term liabilities and generate
steady income to meet their obligations. (Guberti, 2023).
3. Insurance Companies: To match the cash flow responsibilities associated with insurance
policies, insurance companies often invest in corporate bonds. Corporate debt investments
assist insurers in managing their liquidity and meet policyholder claims.
In conclusion, corporate debt is an important asset type that contributes significantly to the world
financial system. It gives investors the chance to make money and control risk while giving businesses
access to finance for expansion and innovation.
References
Chen, J. (2023) Corporate bond: Definition and how they’re bought and sold, Investopedia. Available
at: https://www.investopedia.com/terms/c/corporatebond.asp (Accessed: 05 August 2023).
Corporate bonds (2022) Corporate Finance Institute. Available at:
https://corporatefinanceinstitute.com/resources/fixed-income/corporate-bonds/ (Accessed: 05
August 2023).
Corporate debt (no date) Investopedia. Available at: https://www.investopedia.com/debt-4427751
(Accessed: 05 August 2023).
Donaldson, G. (no date) Corporate debt capacity, Google Books. Available at:
https://books.google.co.za/books?hl=en&lr=&id=PKxQHviLwasC&oi=fnd&pg=PA3&dq=com
mon%2Bcashflows%2Bof%2Bcorporate%2Bdebt&ots=suLc9t8RY&sig=Q3rH6cJ9OfmQKNokqh6rLa1xg0#v=onepage&q=common%20cashflows%20of%20corporate%20debt&f=false (Accessed:
05 August 2023).
Guberti, M. (2023) Corporate bonds: Definition and how to invest | investing | U.S. news, US News.
Available at: https://money.usnews.com/investing/articles/corporate-bonds-definition-and-howto-invest (Accessed: 05 August 2023).
Hayes, A. (2023) Understanding financial risk, plus tools to control it, Investopedia. Available at:
https://www.investopedia.com/terms/f/financialrisk.asp#:~:text=Should%20the%20borrower%
20become%20unable,for%20the%20collection%20of%20debt. (Accessed: 05 August 2023).