Corporate Bonds

Corporate Bonds

While corporations issue stock as equity securities, they also issue bonds as debt securities. The owners of such bonds are in reality loaning the corporation money and thus become creditors of the corporation. As with any loan, the corporation promises to pay back the principal on a specific date in the future and in addition, they will make regular interest payments on the principal. The date that the principal is due is called the maturity date and is normally due and payable semiannually at a stated rate of interest. This stated rate of interest is the coupon or nominal rate. The interest paid to the bondholders is taxable as ordinary income. The standard denomination or par value for a bond is $1,000. So, if you have $10,000 worth of face value in bonds, you have 10 bonds.

Bonds are usually considered less risky than equity securities. The reason for this is that a corporation is obligated to pay the principal and interest according to schedule unlike stock where there is no legal obligation to pay dividends. Because bond interest is paid before stock dividends, bonds are called Senior securities and common stock is called Junior securities.

Many investors buy bonds of a company which has declared bankruptcy (or suspended interest payment) in order to take advantage of market fluctuations. Bonds which pay no interest, but continue to trade (buying and selling of the security) are "trading flat" and trade without accrued interest. This type of trading is highly speculative.

Types of Bonds

There are many classifications of bonds including secured, unsecured, registered, bearer, etc.

Fully Registered - The principal and interest are registered in the owner's name on the certificate and the transfer book. Only the registered owner can receive the scheduled payments and principal when due. When the bond's ownership changes through sales or transfer, the transfer agent will cancel the old certificate and issue a new one. This is the most common type of bond.

Registered to Principal - The owner's name is registered only on the company's books. The bond is issue with interest coupons, which must be sent in to receive payment. When the owner is due to receive an interest payment, he must clip the appropriate interest coupon and send it to the paying agent. In the case of ownership transfer, new certificates do not need to be issued because the bond has no name on it. The transfer agent will record the name of the new owner. The new owner will need to send in the interest coupons when they are due;the principal will be paid to the name that appears on the books at the time of maturity.

Bearer - these are also known as Coupon Bonds. There is no indication or reference to the bondholder on the certificate or on the books of the corporation. The bonds come with interest payment coupons attached, which must be clipped in order to receive payment. Principal is paid to the bearer of the certificate upon maturity.

Bearer bonds have not been issued for many years and as the name implies the principal is paid to the bearer of the bond. The investor must present proof of ownership.