Corporate Bonds

Corporate bonds enable corporations to borrow money directly from the public. These bonds typically pay semi- annual interest over their lives and return the face value to the bond holder at maturity. However, they differ most importantly from government bonds in their degree of risk. A higher risk level is a real factor in the purchase of corporate bonds and traditionally they offer a higher yield to maturity than government bonds to compensate for this risk. Liquidity varies from one issue to another.

Secured, Unsecured or Subordinated Bonds

Corporate bonds are either secured, unsecured or subordinated. Secured bonds have specific collateral backing them but unsecured bonds, also called debentures, have no collateral, and have a lower priority claim to the firm’s assets in the event of bankruptcy.

Unique Corporate Bond Features

• Callable bonds give the issuer the option to repurchase the bond from the holder at a stipulated call price.
• Convertible bonds give the bondholder the option to convert each bond into common shares.
• Extendible bonds give the holder the option of encashing the debt at maturity or of continuing to hold the debt for an additional predetermined number of years.
• Retractable debt is the opposite of extendible: it grants the holder the right to encash the bond at a predetermined date in advance of the regular maturity date.

Callable or Convertible? – A Comparison