What Is a Private Sector Bond?
A private sector bond is a bond issued by a corporation, not the government. Just as the government uses bonds to raise money for large projects and the development of infrastructure, many corporations also sell bonds to raise money. Just as government bonds are backed by the faith and credit of the government, private sector bonds are backed by the faith and credit of the corporation that issues them.
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Bond Basics
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Think of a bond as an IOU. When you buy a private sector bond, you take on the role of lender to the corporation that issued it. The company, in turn, promises to pay you back the full face value of the bond when it reaches maturity. Moreover, just as banks receive interest on loans they give, the company promises to pay you regular interest payments over the life of the bond.
Private Sector Bond Market
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The private sector bond market is one of the largest financial markets in the world. According to the Securities Industry and Financial Markets Association (SIFMA), in 2008, the combined value of bonds trading in the market was more than $6 trillion. The majority of trading activity in this market takes place amongst large financial institutions that buy and sell bonds electronically.
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Issuers
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There are five classes of companies that issue private sector bonds. These include public utilities, such as power and water companies; transportation companies, such as airlines and railroads; industrial corporations; banks; and conglomerates, such as General Electric.
Corporate Bond Taxes
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Private sector bonds are taxed differently than government-issued bonds. Some government bonds, such as municipal bonds, are not taxed. Interest payments you receive from corporate bonds you own are taxed as income each year. In addition, if you sell a corporate bond for a higher price than you paid, you will also incur a capital gains tax that you will need to report on both your state and federal income tax returns for the year in which you sold.
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References
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