Win the War for Money and Success by Neil Jesani

Author:Neil Jesani [Jesani, Neil]
Language: eng
Format: epub
ISBN: 9781733930390
Publisher: BeamaLife Corporation
Published: 2019-05-16T04:00:00+00:00

Corporate Bonds

Corporations issue corporate bonds in order to raise capital for a variety of reasons. It can be for ongoing operations or to expand business. The term “bond” usually applies to securities with maturity of at least one year. Corporate debt instruments with maturity shorter than a year are known as commercial paper.

There are two types of corporate bonds. There are High Grade (also called Investment Grade) and High Yield (known as Non-Investment Grade, Speculative Grade, or Junk Bonds). The bond’s credit rating determines their classification. Bonds rated AAA, AA, A, and BBB are High Grade, while bonds rated BB and below are High Yield. There are significant distinctions as different types of investors purchase both type of bonds. For example, many pension funds and insurance companies are prohibited from holding more than a token amount of High Yield bonds (by internal rules or government regulation.) The distinction between High Grade and High Yield is also common to most corporate bond markets.

The interest earned (coupon value) on corporate bonds is usually taxable income for the investor. It is tax deductible for the corporation paying it. Sometimes the coupon can be zero. When this happens, the zero-coupon bond is sold at a discount. For example, let’s look at a $1000 face value bond sold for $800. The investor pays $800, but collects $1000 at maturity.

Some corporate bonds have an embedded call option that allows the issuer to redeem the debt before its maturity date. These are called callable bonds. Other bonds, known as convertible bonds, allow investors to convert the bond into equity, such as a common or preferred stock. They can also be secured or unsecured, senior or subordinated, and issued out of different parts of the company’s capital structure. As you can see, there are many facets to corporate bonds.

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