Corporate bonds are debt instruments issued by private enterprises, and are sometimes backed by tangible assets of the company issuing the bond. They generally have more credit risk than sovereign bonds due to the fact that they are backed by corporate revenue, which is less reliable than tax revenue. They tend to have higher yields than sovereign bonds, although this is not always the case.
Unlike common stock and preferred stock shares which trade on an exchange, corporate bonds trade over the counter through certain market participants known as market makers. Market makers tend to be large financial institutions such as banks, broker dealers and insurance companies. Corporate bonds typically trade at a level based on internal factors such as the credit risk of the issuer as well as external factors such as interest rates.
Corporate bond holders have a higher claim on company assets and equity than preferred stock holders, and the interest payment on corporate bonds is typically lower than the dividend payment on preferred stock shares. The interest payment is taxable to the bond holder at the federal, state and local level.
As an asset class, corporate bonds are less risky than both preferred stock shares and common stock shares, and typically offer a lower rate of return. They are more risky than most sovereign bonds and offer a higher rate of return.