Definition and Basic Structure
A corporate bond is a debt instrument issued by a company to fund business operations or capital expenditures. By purchasing a corporate bond, an investor effectively lends money to the company and receives periodic interest (coupon) payments plus the return of principal at maturity. Unlike equity, corporate bonds do not confer ownership rights, but interest and principal payments are contractually guaranteed (subject to the issuer's solvency).
Japan's corporate bond market has an outstanding balance of roughly 80 trillion yen, with major issuers including Toyota Motor, SoftBank Group, and NTT. The standard minimum investment is 1 million yen, though an increasing number of bonds targeting retail investors are available from 100,000 yen. SBI Holdings and Monex Group, among others, have been active issuers of retail-oriented corporate bonds.
Credit Ratings and Yield Relationship
Corporate bond yields are heavily influenced by the issuer's credit rating. Highly rated issuers (AAA, AA) can issue bonds at yields close to government bonds, while lower-rated issuers (BBB, BB) must offer higher yields. As of 2024, Japanese AA-rated 5-year corporate bonds yield roughly JGB + 0.2-0.3%, while BBB-rated bonds yield JGB + 0.5-1.0%.
The most important difference between corporate bonds and equities is seniority. In a bankruptcy, bondholders are paid before shareholders from the remaining assets. This makes bonds safer than stocks, but returns are correspondingly more limited. Investing 1 million yen in a 2% corporate bond yields 20,000 yen per year, whereas the same amount in the company's stock could generate much larger returns through dividends and capital gains - but with a higher risk of principal loss.
Common Misconceptions and Investment Considerations
A frequent misconception is that 'bonds from famous companies are safe.' Tokyo Electric Power (TEPCO) was rated AA before the 2011 nuclear disaster, but its rating plunged to speculative grade afterward and bond prices collapsed. Japan Airlines (JAL) defaulted on its bonds when it went bankrupt in 2010, inflicting heavy losses on investors. Practical books on credit risk assessment cover these topics in depth
Key factors for investment decisions go beyond ratings: examine the issuer's free cash flow, interest coverage ratio (operating income ÷ interest expense), and debt ratio. An interest coverage ratio of 3x or higher is generally considered adequate. For retail investors, corporate bond funds or ETFs are recommended for diversification. When investing in individual bonds, limit exposure to no more than 5% of total assets per issuer.