Corporate bonds are issued by corporations to raise money in order to expand their business. These corporations pay semi-annual interest that is half of the stated nominal yield of par value. At maturity, the final interest payment is paid along with the par value of the bond.
Ownership of Bonds
Bonds are classified according to their ownership structures:
- Bearer Bonds: Also known as coupon bonds, Bearer Bonds have no name or other identifying information on them. The principal and interest are paid to the bearer of the bond; hence the name.
- Registered Bonds: Unlike Bearer Bonds, Registered Bonds are registered to the owner. Principal and interest payments are paid to the registered owner by the company or its trustee when the bond matures.
- Book Entry Bonds: These have no certificate, ownership is tracked by computer. Eventually, because of its low cost and easy record access, all ownership will probably be tracked this way in the near future.
Types of Corporate Bonds
Corporate Bonds can generally be classified by the type of issuer:
- Straight-Coupon Bonds pay a fixed rate of interest on the par value of the bond;
- Floating-Rate Bonds pay a variable interest rate that is set at specified intervals at a spread from a specified index.
- Zero-coupon Bonds pay no interest until maturity. Most currently issued zeros are convertible, callable, and puttable. These features allow the issuer to sell the bonds for a lower yield.
- Convertible Bonds are usually convertible into company stock at a stipulated conversion price.
- Puttable Bonds can be sold back to the issuer for the stipulated put price, which, in most cases, is the par value.
- Callable Bonds can be called by the issuer for the call price. In most cases, the call price is initially higher than the par value, but declines to the par value after a specified number of years. There is usually a specified date before any of these features take effect.