Corporate Bonds

(7 of 8)

Corporate Bonds

Many corporations issue (or float) bonds to borrow money for operations. Bonds are typically issued at $1,000 par ("face amount").

Facts about corporate bonds

Long-term corporate bonds mature in 10 to 40 years. They generally pay interest semi-annually (twice a year). Many bonds may be recalled prior to maturity by the issuer.

If a corporation goes bankrupt, bondholders (and stockholders, too) can claim its assets. Bondholders receive assets after the IRS but before stockholders.

Some corporations issue bonds for less than their par values. When they repay the bonds at maturity, the investors receive the face values.

The interest on bonds is stated as a percentage of par value.

How they are quoted

Bond prices are quoted on $100 even though their face amount is usually $1,000. For example, a quote of 85 indicates a bond selling for $850.

Various rating services rate corporate bonds for their credit quality.

Here are three common features of corporate bonds. All of these are established at the time of issue.

Callability

Callability is the feature of a bond whereby the corporation that issued it can redeem the bond before it matures. Corporations may call their bonds when interest rates drop below their current bond rates. They may then replace high-yielding bonds with lower-yielding bonds. Call provisions must be made clear before a bond is issued.

These provisions include the call price, which is the price at which the bond will be sold back to bond issuers.

The call price is usually above par. The company must also include dates on which it can legally begin to order its bonds redeemed.

Puts

A put provision is the privilege whereby the bondholder may redeem a bond at its face value before it matures.

Investors may want to do this when interest rates are rising and they can take advantage of higher rates elsewhere. They may not "put" their bonds whenever they choose, however. The issuer assigns dates for this provision, after which the bondholders may then redeem the bonds.

Convertibility

Convertibility is the option of converting a bond into stock.

Bonds with this feature are called convertible bonds. They give the investor the option to convert the bond into the issuing company’s common stock. Conversion must occur at specified times, at specified prices and under specified conditions, all set down in writing at the time of issue.

Types of Corporate Bonds

Corporate bonds come in many different types, each offering its own variation of collateral and unique features. The same corporation can offer one or more of these bond types, depending on its needs. Here is a quick rundown of the different types:

• Collateral trust bonds are bonds that use other securities as collateral.
• Mortgage bonds are backed (or collateralized) by mortgages on specific assets or physical property of the company issuing them.
• Equipment trust certificates are certificates that offer equipment as backing. Railroads and airlines commonly use them.
• Zero coupon bonds are bonds that do not pay periodic interest but are sold at a discount to make up for the lack of interest payments. Instead of receiving interest, the holder receives the full face value of his bond at maturity. However, investors in zero coupon bonds are still taxed annually for the accreted value of their investments (sometimes called the "phantom tax").
• Convertible bonds are bonds that can be converted into shares of common stock, though certain provisions are attached.