A bond is an interest-bearing negotiable instrument payable on the maturity date by the issuer. Corporate bonds are issued by corporate legal entities to borrow money for expenditures arising from business expansion. Corporate bonds are listed and traded in the capital markets. The following are some of the types of corporate bonds:
Corporate Mortgage is a secured corporate bond characterized by the pledging of company assets as security for a loan. The bond holder has a right to the mortgaged asset when the company is declared bankrupt by a court of law or defaults in the loan repayment. If the sale from the mortgaged assets is insufficient to service the debt then the lender has the right to get his cut out of what the unsecured creditors are being paid from.
Convertible bonds these are bonds in which the bearer can convert it into shares. This can be achieved when face value of the bond is divided by the price of a share. He becomes an equity holder consequently earns dividends. Convertible bonds are an ideal means for acquiring long term funds as the company debt is erased when the bond is converted into stock.
Redeemable bonds are those bonds in which a company has the right to pay off the loan before its maturity date. An advantage of this type of bond is that borrower has the option of paying the outstanding sum when interest rates fall before it matures. However, the lender is paid at a price slightly above the bonds par value to compensate any loss of income.
Collateral trust bonds are not so common and are usually issued by holding companies. These are bonds that are secured when one company holds another company financial assets as collateral until the payment of the loan. So long as the latter does not default she still retains the benefits of owning the asset.
Equipment trust bonds are common in the transportation field and are issued by companies operating in it. They are used to raise capital for equipments and the title to what is being purchased is held by lender until the loan is paid. On completion of payment of the debt, the borrower becomes the rightful owner of the equipment as the title passes to him. Airlines are a good example of companies that issues such bonds.
Sinking fund bonds are bonds issued by companies who make sinking fund provisions assuring the holders that the amount borrowed will be repaid at the time the bond matures. The bond issuer, deposit a certain amount into a reserve on a regular interval until it is sufficient to pay off the debt.
Corporate bonds are a good long-term investment since companies must pay bond interest whether or not the entity makes profits.