Bonds are promissory notes, IOUs if you will, issued by a corporation or government to its lenders. They are usually issued in multiples of $1,000 or $5,000. The standard, or par, is $1,000. The bond indenture specifies the amount of interest to be paid at intervals, (usually every six months), over a specific length of time and the principal, (or original loan amount), to be repaid on the maturity date. A bondholder is a creditor; a shareholder is an owner.
Bonds are often secured, or backed by a specific pledged asset or other form of collateral. If the issuer defaults, bondholders have the right to liquidate its assets and recoup as much of their investment as they can. Here are some examples of secured bonds:
- Mortgage bonds
- Equipment trust certificates
- Collateral trust bonds
Other bonds are unsecured and are known as debentures. The debt is backed solely by the good faith and credit of the borrower. You have already read about a special class of debentures, convertible debentures, which were simply referred to as "convertible bonds" until now.
TYPES OF CORPORATE BONDS
There are many types of corporate bonds:
Though these instruments are risky, they aren't necessarily "junk". Read more in the article Junk Bonds: Everything You Need to Know to learn when junk bonds are a suitable investment.
Repos, fed funds, commercial paper, negotiable CDs and BAs are considered money-market instruments and, as such, they are almost as liquid as cash.
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