Bonds issued by a corporation are called
corporate bonds. When a company needs to raise funds for some type of
investment or expenditure, they often turn to the public markets for
funding. One way to do this is to issue additional stock in the company, but
this has implications on the value of the shares and dilutes ownership. The
other major option is to sell bonds to the public and take on debt. Selling
bonds is often more attractive to companies than getting a loan from a bank.
Corporate bonds are very common and you can find prices and other
information in the financial or business sections of major newspapers. Most
corporate bonds have a par value of $1,000 and carry various maturity dates.
Generally, these bonds pay higher rates than government or municipal bonds
due to the increased risk. Corporate bonds have a wide range of ratings and
yields because the financial health of the issuers can vary widely. All
companies are different and have a different likelihood of defaulting on
their obligations. For example, an old economy blue chip is far less likely
to default than a new technology company. The blue chip's bonds might carry
an investment-grade rating, such as AA. Meanwhile, the less stable company
might issue bonds rated in the junk category. These junk or "high yield"
bonds might look like the superior investment on paper because they will
command a higher yield for the bondholder. However, taking into account the
increased risk of default (which would result in the bondholder going
unpaid), these bonds might not be worth the risk.
If a company goes bankrupt, both bondholders and stockholders can make a
claim on the company's assets. However, one of the benefits of being a
bondholder is that your claim takes precedence over that of stockholders in
a liquidation situation. Additionally, some corporate bonds are "secured."
This means that the debt obligation is backed by some asset that can be
liquidated in order to pay off the interest and principal. Corporations will
often issue mortgage bonds, which are backed by real estate or physical
equipment. These bonds are safer than unsecured bonds, which are backed only
by the "full faith and credit" of the company - which basically means you
are taking their word for it.
Most corporate bonds are straightforward with a fixed coupon rate that
doesn't change until maturity. There are some variations, however. Some
bonds will have a floating rate, which means the interest paid in the coupon
will be pegged to some independent index like the money market interest rate
or the rate on a short term Treasury Bill. While these bonds insure you
against a change in interest rates, they tend to offer lower yields. Another
type of bond that might be issued is a zero coupon bond, which has no
interest payments at all prior to maturity. |
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