Corporate Bonds
Characteristics
You are loaning $
to a corporation
Maturity
Date
Face
Value
Interest
Rate
Characteristics Cont.




Typically the face value is $1000
Can be as much as $50,000
Interest is paid twice a year
At the maturity date, you would cash the bond
in and receive a check for the face value.
 Maturity dates range from 1 to 30 years.
 Short Term = 1 to 5 years
 Intermediate Term = 5 to 15 years
 Long Term = More than 15 years
Why Corporations Sell
Corporate Bonds
 To borrow money
 May be to start a business
 May be to finance business activities
 A corporation may sell stocks and bonds
 Bonds must be repaid
 Must be paid interest
 Stocks do not have to be repaid
 Are not required to pay dividends
Types of Corporate Bonds
 Debenture
 A bond that is backed only by the reputation of the
issuing corporation
 Mortgage Bond
 A bond that is backed by assets of the company.
 Risk is lower, interest rate is lower
 Subordinated Debenture
 An unsecured bond that gives bondholders claim to
interest payments and assets of the corporation only
after all other bondholders have been paid.
 Convertible Bond
 A bond that investors can trade for shares of the
corporation’s common stock.
Methods Corporations use
to Repay Bonds
 Call Feature
 Allows a corporation to buy back bonds
before the maturity date.
 May have to pay the bondholder a premium
 Bond Indenture
 A legal document that details all of the
conditions pertaining to a particular bond
issue.
Why Investors Buy
Corporate Bonds
 Interest Income
 Receive Interest Income every 6 months
 Registered Bond
 Only the owner of the bond can collect money on the bond.
 Registered bond coupon
 Send the coupon in and the interest will be paid
 Bearer Bond
 Not registered in the owner’s name
 Must present coupon
 Will not be repaid if coupon is lost or stollen
 No longer issued by corporations
 Zero-coupon Bond
 Provides no interest payments and is redeemed forr its face
value at maturity
 Sold far below face value
Bond Repayment
 Investors have two choices after they
have purchased a bond
 First, you can keep the bond until its maturity
date and then cash it in. Meanwhile, you
earn interest every 6 months.
 Or, you can sell the bond at any time to
another investor.
 Either way, the value of the bond is closely
tied to the corporation ability to repay it.
Market Value vs. Face
Value
 Bond prices shift as a result of changes in
overall interest rates in the economy.
 If Vanessa has a bond with a 7.5% interest and
interest rates fall below 7.5%, the market value of
her bond increases.
 If overall interest rates rise above 7.5%, new issue
bonds would be more valuable.
 When a bond is selling for less than its face
value it is said to be selling at a discount.
 When a bond is selling for more than its face
value it is said to be selling at a premium.
Shawn purchased a New York Telephone bond that pays 4.5%
interest based on a face value of $1,000. Comparable new
corporate bond issues are paying 7%. How much is Shawn’s
bond worth?
Dollar Amount of Annual Interest
Formula =
$45
7%
Interest Rate of Comparable
New Bond
Face Value X Annual Interest Rate
$1000
X 4.5%
= $642.86
The approximate market value of Shawn’s New York
Telephone Bond is $642.86
A Typical Bond
Transaction
 Full-service brokerage firm
Not too
different from
the stock
exchange
 Provides information and advice
 Discount brokerage firm
 You do your own research and make your own decisions
 Lower commission
 Primary Market
 Directly from the banker that represents the company
 Secondary Market
 Trade with other investors
 Bonds issued by large corporations are traded on the New
York Bond exchange or the American Bond Exchange