01A corporate bond carries several risks
An investor lending to a company requires compensation for time, expected default losses, uncertainty and liquidity. The corporate yield can be viewed approximately as a matched government or reference yield plus a credit spread. Matching maturity and optionality matters. A higher yield is not automatically a better bargain: it may simply compensate for a greater probability of loss. Credit analysis examines cash flow, leverage, interest coverage, collateral, covenants and the maturity schedule.
02Investment grade, high yield and OAS
Investment grade generally starts at BBB− for S&P/Fitch or Baa3 for Moody’s; lower ratings are high yield. Ratings are opinions and can lag changing conditions. An option-adjusted spread attempts to remove the value of embedded options to compare credit compensation more consistently. Spreads also reflect liquidity and risk premiums, so they are not pure default probabilities. A widening spread is usually unfavorable for an existing corporate bond’s price, holding the reference curve fixed.
03Refinancing transmits markets into the business
A company with fixed-rate debt may not immediately pay higher interest when markets reprice. The effect grows as debt matures and must be refinanced, or if borrowing is floating-rate. Higher interest expense reduces cash available for reinvestment, debt reduction or shareholders. Companies with low liquidity buffers or near-term maturity walls can be more vulnerable. Debt/EBITDA and interest coverage are useful screens, but require consistent definitions and cannot replace a cash-flow forecast.