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Corporate Bonds or loan stocks are long term
fixed interest income debt securities income debt securities issued by
companies. They usually have a lifespan of five years and are redeemable at
par value on maturity.
Bond and loan stock issues vary in many ways and have many optional
features. Some are secured by collateral, others are backed by guarantees;
yet others have no collateral support and are only unsecured promises to
pay. In addition, the bond indenture may provide that the bond may be
redeemable at a specified price.
In this way, the issuing company keeps the opportunity to retire the
interest expense if its financial picture makes it possible to call in the
securities.
There are several types of bonds which may be issued by companies:
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Mortgage Bond (MB)
This bond is secured by way of legal charge against assets owned by the
issuer.
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Redeemable Unsecured Bond (RUB)
This constitute unsecured obligations of the issuing company. The interest
and principal payment are not guaranteed.
-
Redeemable Unsecured Guaranteed Bond (RUGB)
The interest and principal payments on this bond is guaranteed by a third
party entity which is usually a bank.
-
Redeemable Secured Loan Stocks (RSLS)
This loan stock is backed by a pledge of assets owned by the issuer.
-
Redeemable Unsecured Loan Stocks (RULS)
This is the same as Redeemable Unsecured Bonds.
-
Redeemable Guaranteed Loan Stocks (RGLS)
The interest and principal payments are guaranteed by an entity other than
the issuer, usually a bank.
Different bond issue pay different interest
rates. These variations results from the credit standing of the issuing
corporation, the collateral that supports the bond, and the situation in the
financial markets when a particular bond issue is sold. Secured and
guaranteed bond and loan stock usually bear lower interest rates as they
carry lower risk of default than unsecured bond and loan stock. Interest on
bond is usually paid every six months.
The interest rate is paid on the face value of
the bond. If the interest rate, or coupon rate, on a bond is six percent,
$100 million bond will pay $6 million in interest each year, or $3 million
each six months. Purchasers of corporate bond is also exposed to interest
risks. As the price of bond moves in the opposite direction of the interest
rate, a high interest rate can result in a short-term loss in the market
value of the bond. A falling interest rate regime should result in
increasing market value.
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